Economics of Healthcare, Pros and Cons to Proposed Tax Changes by the Federal Government
By: Cricia Rinchon
The Institute of Medical Science (IMS) is known for its doctoral research stream, but an up-and-coming program is the Translational Research Program (TRP). The TRP targets students aiming to integrate their domain expertise with projects that emphasize experiential learning and translational thinking. It offers modules such as Intellectual Property Foundations, Translation Thinking, and Health Economics. As an IMS student, I had the privilege of taking the Health Economics Module, coordinated by Dr. Tatiana Lomasko, CEO and founder of Science to Business New Zealand and Science to Wellness New Zealand. The module had an intimate class size of 20 participants.
Throughout the module, we were introduced to the fundamentals of economics and economic analysis, and the interplay between economics and evaluation in health care policy. We applied these principles in an entrepreneurial scenario. Equipped with this knowledge, our challenge for the final class was to work as a group to present on a topic of our choice and facilitate a subsequent class discussion.
One group decided to discuss the proposed tax changes made by the Federal Government towards private corporations. In brief, on July 18, 2017, the Canadian Federal Department of Finance released its proposals for tax reforms that apply to private corporations. The aim of these reforms are to tighten loopholes for the wealthy. The proposed rules identified in Budget 2017 by Finance Minister Bill Morneau will:
- limit sprinkling income using private corporations,
- prevent holding a passive investment portfolio inside a private corporation,
- restrict the conversion of a private corporation’s regular income into capital gains.
Incorporation is the legal process used to form a corporate entity or company, and two-thirds of practicing members of the Royal College of Physicians and Surgeons of Canada (Royal College) in Ontario are incorporated.
Of note, income sprinkling is a prominent loop hole. Income sprinkling is described as a tax-planning arrangement resulting in income that, in the absence of the particular arrangement, would have been taxed as income of a high-income individual, but is instead taxed as income of another lower-income individual, typically a family member of the high-income individual. The effect of the arrangement can be to have income subject to a lower effective income tax rate. Income sprinkling is advantageous to high-income individuals, in particular the principals of private businesses, as they can ‘opt out’ of all or part the progressivity of the personal income tax system to their own benefit. For example, two neighbours living and working in Ontario can each earn $220 000 in 2017. Neighbour #1 is an employee of a mid-sized company, and Neighbour #2 is the owner of an incorporated consulting business and works from home. Neighbour #1 pays $79 000 in income tax for the year. On the other hand, the owner of the incorporated consulting business paid $44 000 in income taxes due to income sprinkling. The government believes that this $35 000 difference is “fundamentally unfair” and erodes the tax base and the “integrity” of the tax system.
If the legislation passes with the addition of Mr. Morneau’s recommendations, owners of professional corporations, specifically doctors and dentists, will feel the most acute tax-planning pain due to their reliance on income sprinkling. The Ontario Medical Association (OMA) once negotiated the right of its members to incorporate, and recent negotiations resulted in the government committing to share structure of physician professional corporations to include non-voting shares for family members. Thus, these changes may have a huge negative impact on Ontario healthcare, as this law could discourage physicians from practicing in Canada, expanding clinical services, and hiring new staff. All these lead to increased waitlist times.
Moreover, the government wants to tax investment income generated savings held within private corporations in an equivalent manner to savings held directly by an individual. It believes that it is unfair that corporate owners have more money left to invest after paying taxes on income than individuals. Corporate active business income is taxed in Ontario at 15% up to the $500 000 small business limit, and at 26.5% above that limit (vs. 53.3%). The removal of the corporation’s ability to be paid refundable taxes upon the distribution of the passive investment income in dividends results in an effective rate of tax upon the passive investment income of 73%. This government’s proposal to change the taxation of passive investment income within private corporations will affect the vast majority of doctors, and they use their professional corporation to save income for retirement. These changes will significantly reduce the amount of investment income available to incorporated members to fund their retirement.
While these amendments are targeted at small business owners, it is important to note that small business owners invest capital, take risks to earn income, and have no job security. Rather, small business owners have 3-4 individuals depending on them to provide work. Employed individuals who are paid salary do not share in this risk-taking, and they receive the aforementioned benefits. In this way, the OMA does not believe it is appropriate or justified to tax small business owners in the same fashion as employed individuals. Importantly, doctors are a unique cohort of small business owners who often accumulate more than $250 000 in student debt, have fixed billable rates controlled by the government, and whose services directly affect the health and lives of individuals.
According to a survey from Concerned Ontario Doctors, 85% of respondents reported that these proposed tax changes will force them to change how they practice medicine: 11% plan to leave Ontario, 21% plan to leave Canada, 26% plan to retire earlier, and a shocking 11% plan to leave medicine entirely and re-train for a new career. Moreover, of the 31% of Ontario doctors who plan to stay in Canada, many plan to reduce working hours (75%), reduce patient services (55%), reduce OHIP services (68%), and lay-off staff (39%). For the doctors remaining, this will likely exacerbate burnout rates, increase waitlist times, and discourage expansion of clinic services and hiring new staff.
Physicians and the government need stronger members to act as liaisons between the two groups and develop a more ethical method of austerity. Perhaps directly affecting the tax rate of small businesses everywhere is not the best solution to tackling governmental problems. Instead, we need to view healthcare in Canada not as a zero-sum game, but as an opportunity to innovate win-win solutions for both physicians and non-physicians. Government spending can be reduced in less important areas in order to reduce governmental budget deficits.
Healthcare is integral to the machinery of any society and one of the top priorities. Tampering with its core workers will always cause disagreement and conflict. Simultaneously, government officials should investigate in greater depth to ensure that all incorporations under physicians are performed with ethical intentions. Any attempts at tax dodging, sheltering, or unreasonable acts of economic gain using the advantage of incorporation should be halted. Streamlining healthcare services–through research, automation of menial tasks, and financial compromise between business owner and government–lies in the future.