mended—speak to your advisor). Every time you are paid, transfer this per- centage of your earnings into another account so you are not tempted to spend it. If your taxes are not due for several months, put the money in a high daily interest bank account or money market fund—that way, al- though the return is lower, there is a low risk of losing your capital. > Deduce what you can deduct. Your RRSP contributions and eligible practice- related business expenses are deductible from your taxable income and will reduce your taxes payable. It is important to maximize these deduc- tions to reduce the amount of taxes you owe. Keep your receipts, ask questions and work with a professional tax advi- sor to gain an understanding of the special circumstances of physicians. > Keep an eye on the calendar. Keep in mind that even if you make your re- quired instalment payments to the Canada Revenue Agency (CRA) on time, you may still have to make an ad- ditional payment on April 30thif a bal- ance is owing.
> Look before you leap. If your practice income decreases drastically due to parental leave or travel, you may tem- porarily stop making instalment pay- ments. However, you should be aware that instalment interest could be payable if your payments are insuffi- cient for the year once you file your re- turn. A professional tax advisor should be consulted for more information. ⌧
Year 1 Example Gross income
Residency (January to June) $ 25,000
Medical practice (July to December) $ 75,000
Total $100,000
RRSP contributions ($15,000)
CPP deduction ($900)
Deductible business expenses ($10,000)
Taxable income $74,100
Total taxes owed (Income taxes and CPP contributions) $19,700
Income tax withheld ($6,000)
Balance owing on April 30th of the following year $13,700
Year 2 Example
Gross income Medical practice (January to December) $165,000
RRSP contributions ($20,000)
CPP deduction ($2,050)
Deductible business expenses ($10,000)
Taxable income $132,950
Total taxes owed (Income taxes and CPP contributions) $47,700
Instalment payment—September 15 ($6,850)
Instalment payment—December 15 ($6,850)
Balance owing on April 30th of the following year $34,000
Year 3 Example
Gross income Medical practice (January to December) $165,000
RRSP contributions ($20,000)
Deductible business expenses ($10,000)
CPP deduction ($2,050)
Taxable income $132,950
Total taxes owed (Income taxes and CPP contributions) $47,700
Instalment payment—March 15 ($3,450)
Instalment payment—June 15 ($3,450)
Instalment payment—September 15 ($20,400)
Instalment payment—December 15 ($20,400)
Taxes owing on April 30th of the following year $0
Year 4 Example
Gross income Medical practice (January to December) $165,000
RRSP contributions ($20,000)
Deductible business expenses ($10,000)
CPP deduction ($2,050)
Taxable income $132,950
Total taxes owed (Income taxes and CPP contributions) $47,700
Instalment payment—March 15 ($11,925)
Instalment payment—June 15 ($11,925)
Instalment payment—September 15 ($11,925)
Instalment payment—December 15 ($11,925)
Taxes owing on April 30th of the following year $0
Note: the following assumes that Year 1 is in 2008. Em- ployment insurance premiums have not been considered in the table below. Ontario tax rates have been used in the following calculations (Years 1–4).
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Fast track:
A diversified portfolio will help you better weather the market conditions to achieve your long-term financial objectives.
Work with an investment advisor to identify your risk tolerance and define your financial goals. Your advisor will develop a comprehensive plan for your financial future and conduct a regular review of your portfolio.
D
epending on your investment ob- jectives, time horizon and capacity for risk, a variety of investment products exist for both growing capital and pro- viding income. Investment markets offer a wide variety of investment products that allow you to build on your capital: stocks, bonds, treasury bills and others. The returns these products offer are usually directly related to the underlying risk they represent. Generally, lower risk is associated with lower returns, but may provide greater security for your initial capital investment; on the other hand, the higher the risk, the greater the likelihood of potential profit or loss. In- vestment products can be broken down into three major asset categories:Cash and equivalents
These are short-term, generally safe investments providing quick access to your money. The expected returns for these investments are relatively low compared to other investments. Bank accounts, Canada Savings Bonds, treas- ury bills and money market funds are examples of these investments.
Fixed income securities
These investments represent debt. Essentially you are lending your money to a bank or corporation for a specified time. The government or corporation promises to repay the face value of your investment and interest. Many fixed-
term investments come with a guaran- tee and are generally safe. They tend to offer better returns than cash and cash equivalent investments, but with slightly more risk. However, some fixed income securities can fluctuate like equities.
Equities
These securities allow you to make money in two ways: if the value of the stock increases, and if the company pays a dividend. Neither is guaranteed. The value of equities can go up or down depending on various factors. Com- pared to fixed income investments, stocks can provide relatively high re- turns but an investor may also have a higher risk of losing a portion or all of their investment.
Investment funds
Investment funds represent a variety of investments from different asset classes. The funds may invest in spe- cific investments such as bonds, stocks from specific industries or geographical areas, or a blend of stock or bond in- vestments. Essentially, investors are pooling their money with other in- vestors when purchasing investment funds. The advantage for an investor is that it provides exposure to a wide se- lection of investments managed by a professional investment manager for relatively low costs. Investors can ob- tain returns from distributions from the fund and the appreciation of the unit value of the fund. Neither is guaranteed and investors have a risk of losing a portion of their initial investment. Examples of investment funds include mutual funds, segregated funds and exchange traded funds.
Diversification
An investment portfolio with a mix of assets to achieve your goals can be ben- eficial. Good diversification allows you to
identify the asset distribution strategy that best suits your investment profile (personal risk tolerance). Diversification consists of choosing securities that bal- ance each other out in order to reduce the portfolio’s level of risk. It reflects the adage “don’t put all your eggs in one basket.” A balanced security distribution means that if one security loses value, another will tend to increase, which pro- motes portfolio stability. It is the number of securities that reduces risk, and judi- cious selection, based on their different responses to economic fluctuations, that makes the difference. An effective diver- sification strategy relies not only on a compromise between the main asset categories, but also between each asset subcategory.
Choosing your advisor
In short, products offering high returns without risk simply do not exist. If a fi- nancial advisor offers you a product that seems to offer exceptional returns without any risk, be wary and ask for a second opinion. Financial institutions usually have tools that allow you to es- tablish your risk tolerance and can sug- gest an asset distribution that will help you meet your objectives. Your advisor will adapt your portfolio based on the tax treatment of the various types of in- vestments (interest, dividends and cap- ital gains). If a physician colleague has a higher risk tolerance than you, it is very possible that they will see greater long-term returns than you. It is easy to be influenced by these stories of high returns, but remember that your col- leagues probably don’t talk as much about the times their returns went south. Upward volatility is easy to han- dle, but downward volatility is much harder to swallow. More conservative investors should opt for a higher per- centage of fixed-interest securities than bolder investors. ⌧
New in Practice 2009: What medical residents need to know before entering practice