3 Reasons You Owe More Tax Than Your Colleagues and What You Can Do About It

When is paying tax a good thing? All profitable businesses have to pay tax, so owing tax means you’re making money. It means your revenue (money in) is greater than your expenses (money out). It means you’re ensuring your (and your family’s) financial well-being. It’s a good thing. 

But you don’t want to pay unnecessary tax. Paying more than you need to is not a good thing. 

If you compare yourself to your colleagues who earn similar revenue and you find yourself with a bigger tax bill, you may want to look into the following reasons. 

1) You missed out on expenses you’re able to deduct

Self-employment is the land of milk and honey… especially when it comes to expenses. If you’ve paid a ton more in taxes than a colleague earning similar revenue, this may be one area to investigate. A good accountant who’s able to coach you through the special rules around expenses for your profession will make your life much wealthier (and more importantly, less stressful!). 

To backtrack for a minute: An expense/deduction reduces your taxes and saves you money. To qualify as an expense, the purchase must have been made in order to operate your business, and be reasonable according to the CRA (Canadian Revenue Agency). The more expenses you deduct, the more money back in your pocket. 

When it comes to expenses, you want to ensure you’re deducting everything you’re able to. Things like mileage, home office, student loan interest and various other categories are often overlooked and/or deducted improperly – leading to less money back for you. We’ve got an entire blog post devoted to Lucrative Deductions You Probably Overlooked; so make sure you check it out! 

There’s still hope if you realize you’ve missed expenses from previous years! When we take on a new client we frequently adjust their tax returns from previous years to recoup missed expenses.

2) You aren’t using your tuition credits 

Your tuition credits can be used to offset (pay) some of the tax you owe. A colleague with similar revenue to you may be using these credits, which could explain why they’re paying less tax than you. 

Let’s first recap what tuition credits are. For every dollar of tuition you pay you earn one dollar in tuition credits, meaning you can earn one dollar tax free. For example, if you paid $100,000 in tuition over 4 years, you’d have $100,000 in tuition credits upon graduation. To simplify, this means the first $100,000 income made will be tax free. You must file a tax return each year you paid tuition in order to get these credits.

A common misconception is practitioners holding on to tuition credits (and not using them) until they’re in a higher income bracket. Your income (and income bracket) doesn’t make a difference. Tuition credits are always used at the lowest tax rate, meaning it doesn’t matter how much you make, they always have the same value. 

When new clients come to us, we always check their past returns and ensure they’ve claimed tuition credits for each year they were in school. We frequently see clients who have had their tuition claims rejected, meaning the CRA didn’t give them the credit they deserved. If this applies to you don’t worry! We can refile your previous years' taxes to get back these tuition credits and lower your tax bill.

3) You’re not structuring your business advantageously 

There’s two business structures for individual practitioners – sole proprietorships and professional corporations. As an associate or clinic owner, you can practise as either. We’ll break down the differences and how they impact your tax bill now. 

As a sole proprietor (what the majority of you are), you’ll pay tax at your personal rate, which depends on your income. You’ll pay tax at a rate anywhere between 20-50% of your income. 

As a professional corporation, you pay tax at the lower corporate rate – about 12% (depending on your province). The key here is that you benefit from this lower corporate rate on funds that are left in your corporation. If you take out money to pay for your living expenses, vacation, etc. you’ll pay tax at your personal rate on those funds. The beauty is you’ll only be taking out the bare minimum amount needed to fund these purchases, so your overall taxes are usually much lower than if you were a sole proprietor. 

You can also opt out of paying CPP (a retirement savings option that is terrible for self-employed practitioners), which will lower your tax bill even further. More on that can be found here. 

If you find yourself with a colleague who’s paying significantly less tax than you, they may be practising as a professional corporation (rather than a sole proprietor). The average practitioner will save anywhere from 7-50% on tax after incorporating – which can explain a big discrepancy in your and your fellow practitioners' tax bills. For more info on how professional corporations work and if it’s a good option for you, click here.