Are you giving the government a tax-free loan?
[Original Post from October 25, 2006]
With our recent “Practice Management” seminar day, I was reminded of something I’ve been meaning to post about — the fact that by far the majority of new residents are overpaying their taxes.
Before you get too far, I want to make one thing clear: I’m a doctor, not an accountant. Talk to someone who’s studied the area for real tax advice. This is just meant as a little tip to raise awareness, and for you to look into things. Your individual situation may vary.
So, you get your paycheque every other week, and it’s a lot smaller than the already-meagre salary you were promised. This is because the Human Resources office is pre-calculating the amount of tax you’re going to have to pay at the end of the year and subtracting portions of that from every cheque. However, as recent graduates from medical school, most of us probably have enough tax credits (primarily tuition credits) that we won’t be paying any tax for the next few years at least.
Unfortunately, you’re foced to use some of these credits (particularily tuition credits) now, as opposed to holding onto them until you’re practicing and in an even higher tax bracket. So when you fill out your tax forms next year, you’ll likely discover you have thousands of dollars coming back to you in April. A lot of people are happy about that… but really, you should be angry. That money is yours to begin with, and you’ve just given the government an interest-free loan while you’re working 80-hour weeks and paying a hefty interest rate on your own line of credit. Doesn’t sound so great now, does it?
So how do you stop these deductions? Ideally you took the first step and filled out the tax form properly when you registered. Do you remember it? It had some numbers already filled in, and the (un)helpful registration staff just told you to sign on the bottom, and not to worry about it. I’m pretty sure 99% of new residents did exactly that, but right there you’ve missed out on a deduction. I assume you went to medical school from January to April of this year — and therefore tuition you paid (even if you paid it the previous fall) for that period counts on THIS year’s taxes. Plus you get a few hundred dollars of credits for each month of full-time studies. I think the details are on the form, or referr to previous year’s tuition tax slips. For U of T, that’s about $9,600 of tax credits; figure out what it was for your school or make an educated estimate. If you have dependent children, then likely there are even more deductions to put on that form.
If you’ve made a mistake you can likely re-submit an edited version. Unfortunately I don’t have the number of this particular form, but your Human Resources department should be able to help you.
Now, that’s a mere puddle compared to the ocean of tuition credits you’ve carried over from the other 3.5 years of medical school; you likely weren’t working (at least not much) so were unable to use those credits. Take a look at your most recent “Notice of Assessment” from CRA — at the bottom there’s probably a paragraph that states
According to this assessment, you have unused federal and Ontario tuition and education amounts available for carry forward to future years of $XXX and $YYY, respectively.
If those amounts are significant, you can fill out a T1213 Request to Reduce Tax Deductions at Source form and send it in to the CRA. I attached a copy of my notice of assessment as proof of the credits. They’ll send you back a letter you can hand in to your HR department and they’ll take those credits into account.
It might seem like a big hassle, but realistically, it’ll take you a few minutes here and there, and give you more money now, as opposed to later. The interest savings alone are worth a few hundred dollars at least — it might not seem like much, but every little bit helps!
Questions? Comments? Contact me.
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