Dental students and associates are a busy bunch. With long hours and a hectic schedule, figuring out your tax filings can slip down your priority list.
This group typically asks about five topics: deductions against your income, moving expenses, impact of extra income, reducing taxes on salary and the benefits on incorporation.
Let’s look at each of these topics and help you maximize your money.
1. What deductions am I able to make against my income?
Years of school can lead to large amounts of debt. Cash flow can be hard to come by with the long hours of studying or work.
On the money you do earn, many are curious about the deductions you can claim to minimize taxes. A few common expenses students can claim include eligible tuition and exam fees (including international fees), interest on eligible student loans and professional membership fees. Deductions can also be carried forward to a year where you begin to earn income. Make sure to claim these each year to build up balances that you can deduct after you start earning income.
The transition from student to resident or associate means you could start earning employment income that allows for a few more deductions that were not previously available. Some examples are parking, travel to or from separate practices and cell phone expenses. To include these deductions, you need a signed T2200 Declaration of Conditions of Employment form. This can be requested from your employer annually.
Review the T2200 form each year as your employer could add or remove expenses.
Most associates earn variable income calculated as a percentage of production. This income is classified as self-employment income and a wide variety of expenses can be deducted against this. Any expense deemed necessary to earn this income by the taxpayer is generally deductible from these fees. This provides more flexibility to claim expenses incurred that would otherwise not be deductible against employment income. Some common examples include professional dues, continuing education fees, travel and conference expenses, and meals and entertainment expenses.These are common deductions and not an exhaustive list of all deductions available.
2. If I moved during the year, what am I able to claim and how does this change my tax return?
Starting a new program at university or a new job means you might be packing your bags and heading to a new place. Most dental students and associates end up moving two or more times before settling down in a community. These moves can lead to increased expenses and other changes to personal taxes, especially if a move is between provinces.
There are two things to consider if you moved during the year: the deduction for moving expenses and the transfer of tuition credits to a new province. Let’s start with moving expenses.
Moving can be an expensive process. To help offset the costs of these expenses, the Income Tax Act allows for the deduction of certain moving expenses. To qualify, the move must be to attend school or for new employment or self-employment, and the distance must be over 40 kilometres. Moving expenses can be deducted in two different ways: the simplified method, or the detailed method.
Under the simplified method, an allowance is provided for the kilometres travelled, the number of meals consumed and the number of nights required for the move. Additional expenses such as moving boxes can also be claimed if you keep the receipts.
The detailed method is based on actual expenses. This includes items such as gas, hotel stays, meals eaten, flights, storage, moving boxes or supplies and any other expense deemed necessary for the move. Keep the receipts for all eligible expenses as CRA requests these for almost every claim made.
In addition to moving expenses, students who move between provinces can also transfer their tuition credits. Each province has different rules for the calculation of credits. However, all provinces except Quebec match the tuition credits of other provinces when an individual moves. Credits from Quebec are tied to the province, but students get credit in other provinces for the equivalent of the federal credits earned while in Quebec. Credits from provinces other than Quebec cannot be transferred into Quebec and therefore no credit is given for this in the first year in the province.
3. If I earn extra income, how do I report this on my tax return?
Debt is a shared experience for many dental students and associates.
There are options for managing the debt. You can work at a part-time job or rent out a room to help increase cash flow. These sources of income need to be reported on your personal tax return but there are also additional expenses that can be claimed against this income.
In the case of a part-time job, your employer provides a tax slip for the income received. This is required to be included on your personal tax return. Deductions from this type of income are limited to only those expenses your employer deems necessary to perform your duties. As such, a signed T2200 Declaration of Conditions of Employment form should be requested and kept on file for support that the expenses were required.
Income earned from renting out space in your residence or through short-term rental sites like Airbnb must be reported. Additionally, household expenses such as portion of utilities, property tax, insurance, and mortgage interest, or in the case of a sublease, rent can be deducted. The percentage to claim is typically calculated as the portion of the square footage that is rented compared to the total square footage of the property. As with any other claim against personal income, it is important to keep all invoices and receipts for expenses claimed against rental income in the case of an audit.
4. How can I reduce taxes on my salary or associate fees to increase cash flow?
Cash flow planning is a very critical process for dental students and associates as attending school usually leads to a large amount of debt. When these students begin to earn either a salary or associate fees, paying down debt is the biggest goal for most students. The best way to manage debt and cash flow is to sit down with a financial planner. However, here are a few easy items to consider to increase cash flow.
The easiest way to reach this goal is to work more. This doesn’t have to mean working more at your main job. Consider a part-time job, Airbnb rentals, subleasing or working as an associate at multiple practices. As discussed previously, you need to report the revenue from this income, but there are additional deductions available for these expenses. This can limit the taxes payable on this extra income as well.
The next option is available only to those who are earning salary income. The Canada Revenue Agency (CRA) created a form that provides employees with the option of identifying the credits they qualify for and allows their employer to reduce their taxes deducted at the source of income. This is known as the T1213 Request to Reduce Tax Deductions at Source form. Possible deductions include RRSP contributions, childcare, support payments, employment expenses, donations, moving expenses and carry-forward tuition credits.
For most dental students and associates, the form is useful for about two years, depending on the tuition credits available and the income they earn annually. If you deplete your credits during the year, you may owe taxes in April. This is generally not an issue if you monitor the credits closely.
5. Is there any benefit to incorporating and if so when is the best time?
As dental students and associates complete their schooling or residency, there are generally two big milestones. The first is higher income as you enter practice and the second is the consideration of whether incorporation is right for your situation.
The second milestone is a big decision and it is important to discuss incorporation with your accountant and financial advisor as this is an individual decision. To start the conversations, here are a few things to keep in mind.
The first item to consider is the benefits of incorporation. Due to recent tax changes, the value of incorporation has decreased but there are still several remaining benefits. First, the tax deferral of earning income in a corporation at a lower tax rate allows the individual to save money faster. Second, earning employment income from your corporation allows for the potential to maximize RRSP room personally. This means you can have diversity in investments and the potential for an individual pension plan through the corporation as you approach retirement age. Third, once you reach age 65, you can split your income with a spouse, leading to reduced personal taxes for both parties. Individual needs vary but, in many cases, all these benefits outweigh the additional costs of maintaining a corporation.
Second, you should consider the expected income you would earn in practice compared to the cash flow required to support your lifestyle. The main benefits of incorporation come from the ability to save at tax-advantaged rates. If you need all your income to support your lifestyle, the benefits of incorporation disappear as your overall tax rate is the same.
Third, keep your future needs in mind. Weddings, buying a house or having kids are exciting events but they are typically expensive and happen shortly after starting practice. Corporations are great tools for long-term savings but may not be very beneficial in the short term. If you need excess cash to finance these events soon, consider delaying incorporation.
Your decision to purchase a practice will impact the timing of incorporation. It is almost always beneficial to use a corporation to purchase a practice. Due to reduced corporate tax rates, the use of a corporation will allow the purchaser to pay down debt used to acquire a practice much faster than would be possible without a corporation.
About The Author
Did you know that MNP offers free personal tax returns for Dental Students and Associates? To see if you qualify for the program, or for more information on how MNP can help you with your taxes, please contact Melanie Langevin, CPA, CMA at 613-691-4226 or melanie.langevin@mnp.ca.
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