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EPR CLIENT NEWS BULLETIN – MEDICAL PRACTITIONERS AND THE GST

April 10, 2018

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Unlike most businesses, medical practitioners[1] only need to collect Goods and Services Tax (“GST”) on certain types of supplies and are restricted from claiming an input tax credit (“ITC”) on costs incurred based on the type of supplies provided.

It is important that a medical practitioner correctly evaluate the GST status of their supplies as either taxable supplies, zero rated supplies or exempt supplies.

Taxable Supplies

If a medical practitioner is a GST registrant and provides a taxable supply they will be required to collect and remit GST on the taxable supply.  Taxable supplies are the most common type of supply and medical practitioners making taxable supplies are required to collect the 5% GST (or Harmonized Sales Tax (“HST”) at the applicable rate).  If a medical practitioner is supplying a service or product which is not a zero-rate or exempt supply then the supply would be a taxable supply.  Any GST paid on costs incurred to make the taxable supply would be eligible for an ITC which would offset any GST collected.

Examples of taxable supplies provided by medical practitioners can include the following: providing reports for non-medical reasons, management fees received, administrative services provided, fees received on research projects, expert witness fees, consulting services, fees for any service which are not diagnostic or treatment based in nature.

A taxable supply may be partially an exempt or zero-rate supply and therefore it is important to evaluate the nature of each transaction and determine what type of supply is being provided.

Zero-Rated Supplies

Some supplies are zero-rated under the GST/HST.  GST/HST applies to these supplies at a rate of 0% and similar to making taxable supplies, medical practitioners making zero-rated supplies are entitled to claim the GST/HST paid on costs incurred related to the making of the zero-rated supplies as an ITC.

Examples of zero-rated supplies provided by medical practitioners are qualifying medical devices, prescription drugs and drug-dispensing services[2].

Exempt Supplies

Some supplies are exempt from the GST/HST and GST/HST does not apply to these exempt supplies.  If you are solely providing exempt supplies you do not charge the GST/HST and you generally cannot claim ITCs to recover the GST/HST on costs incurred to make the exempt supplies.

Examples of exempt supplies are most health, medical and dental services performed by licensed physicians or dentists for medical reasons[3].  This does not include what would otherwise be considered a zero-rated or taxable supply.

What Should You Do?

Medical practitioners should identify if they are providing a mix of taxable, zero-rated or exempt supplies, each of which would result in their respective GST/HST treatment.  Taxable supplies would require GST/HST to be collected while zero-rated and exempt supplies would not require GST/HST to be collected.  GST/HST paid on costs incurred to make taxable supplies and zero-rated supplies would be eligible to claim ITCs while costs incurred to make exempt supplies would not.

CRA has provided administrative guidance on types of supplies and examples of taxable supplies, zero-rated supplies and exempt supplies here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-gst/charge-gst-hst.html#type.

Please note that what has been outlined above is general in nature and that the GST/HST rules are complex.  Before you make any changes to your GST/HST, please consult your tax or accounting advisor.

Maple Ridge: eprmr@eprcpa.ca
Langley: eprly@eprcpa.ca

[1] Medical practitioner is defined as a person who is entitled under the laws of the province to practice the profession of medicine or dentistry

[2] As outlined in Excise Tax Act and its Regulations

[3] As outlined in Excise Tax Act and its Regulations

2017 BUDGET – PROPOSED TAX CHANGES

On July 18, 2017, the Department of Finance released its consultation policy paper on the taxation of private corporations first announced in Budget 2017, along with proposed legislation on some of the topics addressed.

The Minister’s introductory letter acknowledges the Government’s objective of reducing taxes on the middle class and raising taxes on the richest one percent of Canadians. The proposed changes will, however, have much broader implications than the Government’s stated mandate. If enacted, the proposals will significantly affect most Canadian private corporations, including family businesses, farmers, independent contractors, self-employed tradespeople, and incorporated professionals. Furthermore, new income-splitting proposals specifically target stay-at-home spouses and young Canadians who are attending post-secondary education.

Here is a quick summary of some of the key tax changes proposed by the Federal Government:

  1. Do you employ family members?  The Government wants to scrutinize their compensation to apply a much higher tax rate on income they consider “unreasonable”.
  2. Do you pay dividends to family members?  The Government is proposing tax dividends to children between the ages of 18 to 24 at the highest combined tax rate.  Dividends to non-active spouses will be under scrutiny as well.
  3. Do you invest the profits from your business? The Federal Government is proposing to tax that income at an effective rate of 70%.
  4. Do you want to pass your business on to your children? Tough new rules make it difficult for younger kids to get the capital gains exemption.

Small and medium-sized businesses (SMEs) are the engine of the Canadian economy – estimates range from 85 to 90% of all businesses in Canada are SMEs.

We have attached a template letter to send to your local Member of Parliament. Government needs to know that this tax reform will harm businesses of all sizes.

Don’t know where to send the message to your Member of Parliament? Look up their address using your postal code.

 Yours truly,

 

EPR MAPLE RIDGE LANGLEY
CHARTERED PROFESSIONAL ACCOUNTANTS

UNDERSTANDING YOUR SHAREHOLDER LOAN ACCOUNT

Your shareholder loan account is made up of all capital that you contribute to the corporation and all purchases made on behalf of the corporation using personal funds or personal credit cards netted against cash withdrawals and personal expenses paid by the company on your behalf.

As long as you do not withdraw more than what you initially contributed to the business, you can withdraw the balance of your shareholder loan account on a tax-free basis.  If you draw too much money from your business so that you end up owing the corporation money, you have one year from your fiscal year-end date to pay it back. This can be repaid either via direct repayment, salaries or dividends. If the amount is not repaid, the amount of the loan will be included in full on your personal income tax return.

Withdrawals from your shareholder loan account include cash, personal expenses paid by the corporation, and property transferred to you personally. If you take property out of the corporation be sure that you transfer the asset at the fair market value just as if you purchased it from a company that you had no interest in.

Interest does not have to be paid on the amounts owing to the shareholder however, if interest is paid, then a legal contract should be drawn up stating an obligation to pay interest and the actual amount of the interest. The interest paid on the shareholder loan is then deductible to the corporation and taxable to the shareholder.

CRA has specific rules about corporate shareholder loans. Since corporations often pay tax at preferred rates, CRA is concerned that owners could take money out of their company without paying personal income tax on it. CRA specifies that if a shareholder owes money to the company on two consecutive year-end balance sheets, the principal portion of the loan must be included in the shareholder’s income tax return. It also notes that a series of loans and repayments will be viewed as one continuous loan. This prevents the shareholder from paying the loan off just prior to year-end and then re-borrowing the money just after year-end so the loan does not show up on the balance sheet.

You need to be continuously aware of your shareholder loan balance. From a tax perspective, it is often advantageous to eliminate the amount that you owe the company by issuing a bonus or declaring a dividend to the shareholder rather than having the amount included on your personal income tax return by CRA.

For more information on shareholder loans, please contact your EPR office.

Reprinted with permission from EPR Canada.

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