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Health-care professionals say change to small-business deduction forces them to pay tens of thousands more a year. (FabioBalbi/Getty Images/iStockphoto)
Health-care professionals say change to small-business deduction forces them to pay tens of thousands more a year. (FabioBalbi/Getty Images/iStockphoto)

Doctors warn thousands could leave for U.S. over new federal tax hikes Add to ...

Canadian physicians are warning that thousands of specialists will pull out of group medical offices and many will ultimately leave for the United States because of new federal tax changes that will soon be approved by Parliament.

An aggressive lobbying campaign by doctors, radiologists and other medical professionals has failed to sway Finance Minister Bill Morneau, who is rejecting calls to remove a provision in the budget that doctors say will force them to pay tens of thousands more a year in taxes.

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National medical organizations flooded MPs with e-mails and meeting requests in recent weeks in an effort to have members of the House of Commons finance committee amend a budget bill to remove a controversial clause.

But Mr. Morneau appeared to shut the door on that campaign this week during an appearance before the committee. The minister’s office later confirmed to The Globe and Mail that the government will not be making the changes requested by the medical community.

The decision has shocked and infuriated physician organizations. They had believed their inclusion in the tax change was simply a technical oversight that would be corrected.

“Physicians will leave the country because they’ll see Canada as not very attractive,” predicted Ray Foley, executive director of the Ontario Association of Radiologists, in an interview. Mr. Foley estimated the number of departures for the United States could be in the thousands because it will add to the frustrations doctors are already facing with provincial governments. “Particularly in Ontario, where we have already a turbulent environment with the ministry of health in terms of [contract] negotiations. It’s not a difficult argument to make. Why do we want to stay here and be public enemy number one?” he said.

Mr. Morneau’s March, 2016, budget announced a change to the small-business deduction to prevent business owners from multiplying access to the small-business tax rate by using complex partnerships and corporate structures. The budget suggested this move was meant to address “the ability of high-net-worth individuals to use private corporations to inappropriately reduce or defer tax.”

The change could apply to a wide range of professionals, including lawyers, architects and accountants who work in a common corporate structure. However, physicians argued they should be exempt because their fees are regulated and extra costs can’t be passed down to consumers.

Further, doctors argue these groupings of specialists have been encouraged by provincial governments as a public policy decision aimed at improving heath-care results by sharing knowledge and expertise.

The change would apply to medical specialists who pool their income in a corporate structure. According to the Canadian Medical Association, Canada has about 80,000 physicians and about half are specialists. Of those, only about 10,000 to 15,000 specialists work in the type of income-pooling structures that would be affected by the tax change.

John Feeley, a CMA vice-president, said the change has created high levels of concern and uncertainty among members who are unclear whether they will be affected by the change. Accounting work conducted for the CMA found that in some cases, doctors will end up paying tens of thousands more a year in tax. He agreed some doctors will likely leave for the United States as a result of the change.

Mr. Feeley said his organization is “very disappointed” with Mr. Morneau’s position and will be taking its campaign to the Senate, which will soon be asked to review Bill C-29, the budget bill that contains the change.

Daniel Lauzon, a spokesperson for the Finance Minister, said doctors can still incorporate in group structures, but they will have to share the small-business deduction if they are essentially one business.

“All it does is clarify that one small business equals one small business deduction,” he said in an e-mail.

Conservative MP Dan Albas, who raised the issue as a member of finance committee, said the minister’s position won’t raise more money and will put health care at risk by encouraging some doctors to leave.

“Now we know from the minister’s contributions at committee that this [change] is really because they believe that these structures are about dodging taxes, which they’re not. They’re set up by provinces and territories to make health care more efficient,” he said.

The debate with doctors is part of a larger discussion related to the small business deduction. It currently allows for a federal tax rate of 10.5 per cent on business income up to $500,000. The Liberal Party campaigned on a pledge to lower this to 9 per cent but has since shelved that plan.

Companies with income above $15-million do not qualify for the small business deduction. The federal corporate tax rate is 15 per cent.

Some tax experts have suggested the small-business deduction should be eliminated entirely and all businesses should pay the corporate rate because the lower rate does not boost investment and imposes a compliance burden on business and government.

“There’s no real rationale for it,” said Lindsay Tedds, an associate professor with the School of Public Administration at the University of Victoria. “I’m not convinced that the benefits exceed the costs.”

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