November 19, 2019
by David Chong Yen, CPA, CA, CFP; Louise Wong, CPA, CA, TEP; and Eugene Chu, CPA, CA
As we approach the end of the year, it’s common for many people to look at their bank accounts and question where all the money they made has gone. Taking control of your finances requires discipline and we have provided some tips and tricks that will help you keep more money in your pockets as well as avoid some potential headaches.
Employee versus Independent Contractor
Hygienists can be either employees or independent contractors. The distinction is important because it will determine not only how you file your income tax return, but what you can deduct and how much taxes you will have to pay. If you are not sure if you are an independent contractor or employee, take a look at your last paycheque. Employees receive a paycheque with income taxes, CPP and EI already deducted. For example, if you earned $2,000, you may have only received $1,500 because $500 of income taxes, CPP and EI was paid to the CRA. In contrast, independent contractors would receive the full $2,000 and pay the taxes when they file their personal tax returns. We have identified the advantages and disadvantages of each in the table below.
It’s important to note that while you may prefer one over the other, the CRA may have a different opinion and will use the following factors below to determine your status.
Instead of asking for a raise or bonuses, consider whether a non-taxable benefit would provide a bigger impact. For example, instead of a bonus, ask for a gift. Each employer is allowed to provide unlimited number of non-cash gifts and awards to employees up to a total of $500 each year. These gifts are not taxable, they won’t show up on your T4 or personal tax return. Other examples include health insurance/health spending account, discounted or free dental care for employee and their families.
You may have heard from colleagues, friends and family about incorporating and how it saved them thousands in taxes. While it’s true that a significant amount of taxes can be saved/delayed due to the low corporate tax rate of 12.5% in Ontario, hygienists who are considering incorporating should ask themselves the following first:
1. Am I an employee or independent contractor?
Employees who incorporate are at risk of being labeled as a “Personal Service Business” (PSB). CRA restricts the tax deductions available to PSB as well as increases the corporate tax rate from 12.5% to 44.5%. In short, if you are an employee, it is not tax beneficial to incorporate.
2. How much money do I make?
The more money you make, the more tax savings are available through incorporating. It costs money to incorporate and to maintain a corporation. Legal and accounting fees to incorporate can be thousands of dollars. Annual corporate tax returns and financial statements will likely be much higher than filing just a personal tax return. In general, you would need taxable income of at least $120,000 for the tax savings to start outweighing the costs.
3. Do you need all your money right now?
One of the primary benefits of a corporation is that you can delay your taxes as long as you leave the money inside the corporation. If you take out all the money for personal use then there would be no benefit of having a corporation. You may wish to track your personal expenses (mortgage, car payments, child care, groceries, restaurants etc.) and determine whether you would be able to leave say 25% of your earnings inside a corporation without missing a bill payment. If not, then a corporation may not provide any benefits.
Planning for retirement
Saving for retirement may not be high on your priority list, but it’s something you need to consider because the earlier you start the easier it becomes. Here are some ways to get started:
Tax free savings account (TFSA)
TFSAs allow you to earn tax-free investment income. For example, if you have $50,000 in your TFSA invested and it earns 5% ($2,500), you won’t have to report the $2,500 on your personal tax return. When you withdraw from a TFSA, there will also be no taxes to pay. Check with CRA to determine your TFSA balance. If you have never contributed to a TFSA you may have up to $63,500 in contribution room. Every year you can contribute up to the annual limit ($6,000 for 2020) towards your TFSA.
Registered Retirement savings plan (RRSP)
RRSPs give you a tax deduction on your personal tax return. For example, if your income is $100,000 and you contribute $15,000 towards your RRSP. You would pay taxes on $85,000 of income, not $100,000. In the future when you retire, the money you withdraw from the RRSP would be taxable. Any investment income earned on your RRSP would also grow tax-free until it’s withdrawn. The idea behind RRSPs is that you get a tax break now in your working years when your income is higher and in the future, when you have little income, you will be able to withdraw the contribution plus any investment earned on it at more favourable tax rates.
Paying down debt
You don’t want to go into your retirement years with debt. Historically low interest rates have made many families defer paying off loans. This can become a slippery slope and small changes to how you manage money can make a huge impact. For example, many people will have money sitting in a savings account earning 1% or less versus making a lump sum payment towards their mortgage or line of credit which charges interest at 3%-4% or more.
There’s no one size fits all plan. Your individual circumstances will dictate which of the above you should prioritize. Some advisors will tell you to invest in an RRSP then use the tax refund from the RRSP to pay down debts or contribute to a TFSA. Other advisors might say TFSAs are the way to go because you can always take the money out if you need it without penalty. TFSA’s provide the most flexibility, paying down debt carries the least risk and RRSPs will provide immediate tax relief. Whichever you choose, all three are a step in the right direction.
About the Authors
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail email@example.com / firstname.lastname@example.org / email@example.com . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
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