It’s a mistake to confuse capital gains tax breaks with doctors’ pay

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When Ontario Premier Doug Ford warned that Ottawa’s increase in capital-gains taxes would cause family doctors to pack up their practice, he was accidentally pointing to his own failure.

Here was the paymaster of the province’s doctors – the leader responsible for making health care work in Canada’s most-populated province, and who controls all the levers for training and retaining physicians – telling citizens that unless physicians can build more tax-free equity in their careers, the health care system will fall into crisis.

Somehow, it has become common for provinces, and doctors, to think we pay physicians with tax breaks.

This is the second time in a decade that doctors have been at the forefront of opposition to changes to tax rules. Physicians were screaming it was unfair when the Liberal government in Ottawa proposed small-business tax reform in 2017 that sought to cut the advantages of sheltering passive investments in a private corporation. The feds backed down.

Once again, two things are being mixed up in public-policy debate. The necessity of retaining needed family physicians is hacking into the debate over capital-gains taxes.

Changes to capital-gains tax may prompt doctors to quit, CMA warns

Many doctors feel they were more or less told years ago to incorporate by provincial governments trying to keep fees down. In 2005, for example, Ontario’s Liberal government struck a fee deal with doctors that also made it easier to incorporate – deferring costs and dumping part of it onto the federal treasury.

No wonder doctors, particularly some close to retirement, feel the rug has been pulled out from under their financial plans. They were dragged into a trap when health care HR was mixed up with tax policy.

But that’s no reason to keep building tax policy around the shortage of family doctors.

To develop more family physicians, provinces such as Mr. Ford’s Ontario can open more places in medical schools. If financial incentives are needed for them to work longer, provinces can adjust pay or even provide benefits.

The change unveiled in the federal budget earlier this month increased the inclusion rate for capital gains so investors will be taxed on two-thirds of the gain, rather than 50 per cent. There’s an exemption for the first $250,000 for individuals, but it doesn’t apply to corporations.

That means many doctors and other professionals who used corporations as vehicles for all their retirement savings and paid themselves in dividends can expect a hit – perhaps a few percentage points off their retirement income, said Mark McGrath, a Squamish, B.C.-based financial planner and associate portfolio manager at PWL Capital Inc.

That’s a tax trap for such folks if they are near retirement. But doctors with years of practice left can find ways to lessen the impact, including by paying themselves salary and setting up an Individual Pension Plan through their corporation, Mr. McGrath said.

“There are definitely ways to mitigate these changes through sound financial planning,” he said.

The inclusion rate for capital-gains taxes was lowered in 2000 to encourage investment. But as a matter of public policy, the key goal is to encourage entrepreneurial, risk-taking investment.

Most doctors’ medical corporations aren’t usually in that category. Physicians are paid fees by the state and have a teeming clientele the moment they set out a shingle, so they can’t expect to sell their practice for a big gain. Their corporations tend to be used to hold passive investments in a tax-sheltered vehicle.

All this means that, while the capital-gains tax changes will hurt doctors, especially late-career ones, they aren’t likely to cause thousands to pack up practice.

“This is going to affect the higher-paid specialties rather than the lower, or some might say underpaid, specialties,” said Arthur Sweetman, professor of health economics at McMaster University.

Those lower-paid specialties include the ones in noticeably short supply in many places, such as family doctors and psychiatrists.

Prof. Sweetman noted there are significantly more family doctors per capita in Canada than there were decades ago, but patients are older on average and family doctors are working much shorter hours.

The main lever to supply doctors is through medical-school admissions controlled by provinces. But if premiers want to set incentives for doctors to work longer hours, they could do it through fees for in-demand specialties such as family medicine and psychiatry.

The place to pay doctors – and keep them working – is not in the tax code.