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Transition to Residency

March 31, 2015

uOttawa

James Pitruniak, Early Career Specialist

Planning, Saving, Preparing

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Agenda

Financial Planning 101

Debt Management

Credit Management

Tax Planning for Residents

Saving and Investing

Questions for Residents

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Financial Planning 101

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The Role of Your Financial Advisor

Assess your overall financial health

Understand you and what you want to achieve financially; understand what

you have and what it does financially; develop a financial plan to meet your

goals

Practice preventative financial health

Revisit financial plan and adjust accordingly; update insurance coverage;

monitor your investment portfolio and assist you in rebalancing it when

required

Refer to a specialist when necessary

Advice regarding your need for accountant, lawyer, or insurance specialist

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Your Professional Team

A team of experienced and knowledgeable advisors will save you considerable time and money.

Choose professionals who have extensive experience working with physicians.

Ask a colleague to recommend someone, or your financial advisor can provide you with a local referral list.

Financial Advisor

Accountant

Insurance Specialist

Lawyer

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Net Worth Statement

A snapshot of your financial position that will change over time

Compares what you own (assets) to what you owe (liabilities)

Set yourself an annual goal.

Review results at the end of the year.

The trend is what’s important.

Assets - Liabilities = Net Worth

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PGY2 Net Worth Statement

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Cash Flow Statement

Money In (Revenue)

Money Out

(Expenses)

At the end of each month, what’s left over: + or – ?

Important to generate + cash flows to grow net worth

Current cash flow and debt (NOW) will affect your finances in residency and practice

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Improving Cash Flow

Track and reduce expenses

Budget and control current expenses

Managing or restructuring debts

Developing a savings strategy

Set goals

Make savings automatic

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Sample Resident Cash FlowSource of Funds

(In-flows)

Funding Monthly Annually

Salary $3,124 $37,488

Total $3,124 $37,488

Use of Funds(Out-flows)

Funding Monthly Annually

Registration Fee $50 $600

Other Fees $220 $2,634

Rent $800 $12,000

Other $1,200 $14,400

Interest Costs $375 $4,500

Total $2,645 $31,740

This resident has a $479 monthly cash flow

surplus!

1. Pay down debt?2. Save/invest?3. Both?

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Debt Management

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Debt Management

Track current balances and key details: Interest Rate: Fixed vs. Variable

Minimum Payments Required

Length of Repayment Period

Pay the highest interest debt first or consolidate

Set a goal and pay yourself first Treat your debt payments like a bill payment

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You Need to Know…

Is your bank going to change the rate?

When does the repayment schedule start (blended payments – principal +

interest)?

What is the amortization of the loan (repayment period)?

What is the interest rate? Is it fixed or variable?

Will it be converted to a term loan or remain a line of credit?

Are you able to keep the line of credit limit in place after it’s repaid?

There might be benefits to keeping the credit in place – set up costs of practice,

emergency fund, good lending rate.

What happens to your line of credit when you finish residency?

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The Impact of Interest

Amount Borrowed Amount Owed

$50,000 ~$61,000

$80,000 ~$98,000

$150,000 ~$183,000

Making your monthly interest payments will help

you to avoid adding to your debt load during

residency.

If no interest payments are made on a line of credit during a five year residency, you would owe:

Calculations are based on compounding monthly interest rate of 4.00%

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Loan ConsolidationNot Consolidated

Student loan: $50,000

Interest rate: Prime + 2.5%

Loan amortization: 9.5 yrs

Monthly interest + principal

payment: $652

Line of Credit: $80,000 Interest rate: Prime Monthly interest payment: $200

Total Monthly Debt Payments

(not consolidated): $852

Consolidated Loan to LOC

LOC balance: $130,000

Interest rate: Prime

Monthly interest payment: $325

Cash flow increases by about $527

per month with consolidation!

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Consolidate Student Loans?

Resident Loan Interest Relief Program

MOHLTC pays the interest on federal and provincial student loans and defers principal repayment.

Program requires an agreement to practice in Ontario for five years after residency completed in Ontario.

Can pursue fellowship inside or outside Ontario but must begin repayment

Do NOT qualify if you have already consolidated

Penalties for breach of ROS are stiff: repay all interest (with interest) + administrative fee

For more information: 1-877-957-5747

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Consolidate Student Loans?

Canada Student Loan Program

Family medicine residents and physicians

are eligible for federal loan forgiveness of

up to $8,000 per year to a maximum of

$40,000.

Must practice in a recognized under-served

rural or remote community

Must continue to pay loans throughout the

year; loan forgiveness applied at the end of

year

Does not have to be in the same

community continuously

E-mail info@canlearn.ca

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Case Study: Lisa and Loan Consolidation 26 years old Single, no dependants Recent graduate of Queen’s

University School of Medicine

On July 1st, Lisa will be starting residency in rural family medicine at uOttawa.

After two years of residency, she hopes to LOCUM in other rural communities for 2-3 years.

As a gift for finishing medical school, her parents bought her a second-hand car to use during residency.

She plans to rent a modest apartment in the community where she will be working.

Has a student-resident line of credit with a $120,000 balance and a $250,000 limit repayable at prime (3%)

Has a $40,000 Canada-Ontario student loan ($28,000 federal, $12,000 provincial)

Based on her projected cash flow, Lisa and her advisor believe she can repay $500/month of debt in residency and $1,000/month for the first three years of practice.

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Case Study: Lisa and Loan ConsolidationAssuming she qualifies for the Canada Student Loan Forgiveness Program, should Lisa consolidate her student loans onto her line of credit or keep them intact to take advantage of the program’s

benefits?

Key Considerations

Which option will result in the lowest total debt level after five years?

Which option will result in the lowest total interest paid/charged after five years?

We are seeking to understand which option is best for Lisa, given a set level of debt payments ($6,000 for each year in residency, $12,000 for each year in practice).

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Scenario 1: Consolidate

• The prime rate will remain constant at 3% for the next five years.

Scenario Assumptions

End of R1 End of R2 End of P1 End of P2 End of P3

Annual Repayment $6,000 $6,000 $12,000 $12,000 $12,000

Line of Credit Balance $158,620 $157,199 $149,555 $141,681 $133,572

Annual Interest Charges

$4,620 $4,579 $4,356 $4,127 $3,890

Total debt outstanding after five years = $133,572Total interest charges after five years = $21,572

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Scenario 2: Loan ForgivenessScenario Assumptions

The prime rate will remain constant at 3% for the next five years. Her student loan is repayable at 5.5% The program entitles Lisa to up to $8,000 of federal loan forgiveness at the

end of each year she serves in a rural community. She must repay the loans throughout the year.

Lisa begins repaying student loans at the beginning of residency, foregoing the available six month grace period.

Lisa’s priority during residency is repaying government student loans, so for the first two years, she devotes all funds earmarked for debt repayment ($500/month) to her student loans.

During practice, her monthly student loan repayment amount stays constant at $500 and the additional $500 she has available is put towards her line of credit.

The annual refund Lisa receives as a result of student loan interest tax credits is put towards her line of credit on an annual basis.

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Scenario 2: Loan ForgivenessLine of Credit Balance = $120,000

Student Loan Balance = $40,000 ($28,000 federal, $12,000 provincial)

End of R1 End of R2 End of P1 End of P2 End of P3

LoanRepayment $6,000 $6,000 $6,000 $6,000 $2,196*

Line of Credit Repayment $436 $301 $6,158 $6,055 $9,804

Loan Forgiveness $8,000 $8,000 $4,007** $0 $0

Annual Loan Interest $2,073 $1,429 $751 $261 $27

Annual LOC Interest $3,587 $3,685 $3,611 $3,538 $3,350

Loan Balance $28,408 $16,227 $7,420 $2,170 $0

Line of Credit Balance $123,151 $126,535 $123,989 $121,472 $115,018

Total debt outstanding after five years = $115,018Total interest charges after five years = $22,312

*Loan paid off in full in November of P3**Only $4007 of Canada portion remaining in P1 that is eligible for forgiveness

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Comparing OutcomesScenario 1: Consolidate

Total debt outstanding after five years = $133,572Total interest charges after five years = $21,572

Scenario 2: Student Loan Forgiveness

Total debt outstanding after five years = $115,018Total interest charges after five years = $22,312

In this scenario, retaining her student loans and taking advantage of the CSL program will mean that Lisa owes approximately $18,554 less after five years than if she had consolidated her loans. This more than makes up for the $740 that she will pay in additional interest over that period.

Conclusion

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Credit Management

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Credit Rating Your credit rating is an important negotiating tool for future funding

(line of credit, mortgages, practice start-up loan).

A high (good) credit score can give you prompt access to loans.

A low (bad) credit score can result in extra interest charges and

may reduce the amount you can borrow.

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How to Check Your Credit• You should review your credit rating every 1-2 years

to ensure there are no mistakes on your file that will reduce your credit score.

• You can order a copy of your credit report online at one of the following:

www.equifax.ca www.transunion.ca

• With both these providers, you have the option of viewing your report and score online instantly for a nominal charge or receiving a free copy of your report by mail.

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Improve Your Credit Score

Pay bills on time – utility, cable, cell phone. Pay bills in full by due date or at least ensure that you’re

making minimum payments. Try to pay your debts as quickly as possible. Avoid going over the limit on your credit card, and try to keep

balances relatively low. Reduce the number of credit applications that you make. Build a positive credit history – borrow, repay, repeat.

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Tax Planning for Residents

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How Much Will I Make?

Annual Salary = $51,065.00 (Semi-Monthly Payment)

Gross Semi-Monthly Pay $2,127.00

Income Tax $385.37

Canada Pension Plan $98.10

Employment Insurance $37.87

Long Term Disability $13.79

PARO Dues $29.78

Net Semi-Monthly Pay $1,562.81

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Ontario Resident Pay Scale

Salary Scale as of January 2011

PGY1 $51,065

PGY2 $59,608

PGY3 $63,230

PGY4 $67,512

PGY5 $71,995

PGY6 $76,210

PGY7 $79,220

PGY8 $83,704

PGY9 $88,188

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Ontario Tax Rates 

 Taxable IncomeMarginalTax Rate On Salary

Marginal Tax Rate on Private Company

Dividends

Marginal Tax Rate on Public Company

Dividends

$ 1 — $ 11,038 0.00% 0.00% 0.00%

$11,039 — $ 39,723 20.05% 4.02% 0.00%

$39,724 — $ 43,561 24.15% 7.90%  3.77%

$43,562 — $ 69,963 31.15% 16.65% 13.43%

$69,964 — $ 79,448 32.98% 17.81% 14.19%

$79,449 — $ 82,422 35.39% 20.82% 17.52%

$82,423 — $ 87,123 39.41% 23.82% 19.88%

$87,124 — $135,054 43.41% 28.82% 25.40%

$135,055 - $509,000 46.41% 32.57% 29.54%

> $509,000 49.53% 36.47% 33.85%

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Tax Deductions vs. Tax Credits

Deduction Credit

A reduction in your taxable income A “write off”

Example:

Earn salary income of $60,000/year…

Qualify for a $1,000 tax deduction

Taxable income reduced to $59,000

A reduction in taxes owing Use applicable federal and provincial

% amounts to calculate savings

Example:

Qualify for a $1,000 tax credit

Multiply by 15% federal, 5.05% Ontario

Reduce taxes owing by ~ $200

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Deductions and Credits for Residents

Deductions Credits

Moving expenses RRSP contributions Professional or union dues Childcare expenses

Tuition, education, textbook credits

Government student loan interest Public Transit Tax Credit First Time Home Buyer’s Credit Children (fitness, arts) Medical expenses Charitable donations And MANY more…

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Tuition and Education Tax Credits

Earned by paying tuition and spending time in post-secondary

educational program

Must be used if you owe taxes

May carry forward to future years if not used

Accumulated amount can be found on your Notice of Assessment

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Notice of Assessment

Received from CRA after you

file your annual tax return

Summary of Tax Return

RRSP Deduction Limit

Home Buyers’ Plan Repayment

Education and Tuition Tax

Credits

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Resident Tax Tips Moving expenses are deductible for

those who move more than 40 km

closer to work or full-time school.

PARO, CPSO, CMPA, and

OMA/CMA dues are tax deductible.

You can reduce taxes withheld from

paycheque by completing a TD1 form

in PGY-1.

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Resident Tax Tips First-time home buyers are eligible for a tax credit of up to $750 in the

year of acquisition of the new home.

Public transit monthly passes generate a tax credit.

As of 2012 a tuition credit is available for fees related to writing LMCC

exams to a maximum of $250.

T2200 for employment deductions

If starting to invest, consider a Tax Free Savings Account or a Registered

Retirement Savings Plan.

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Saving and Investing

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Registered Investment Accounts

Investment Accounts

Assets

Investment Income

RRSPs, TFSAs, RESPs

GICs, Stocks, Bonds, Managed Products

Dividends, Interest, Capital Gains

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RRSPs – The Basics

A personal tax-sheltered retirement plan for Canadians up to age 71

RRSP contributions are tax deductible.

Tax deductible contributions limited by annual contribution room:

18% of previous year’s earned income up to a maximum of

$24,270 for tax year 2014

PLUS any unused contribution room from previous years

Funds are taxable as income upon withdrawal.

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Benefits of RRSPs

1. Contributions are tax deductible

2. Tax-sheltered growth of invested funds

3. Special plans for first-time home buyers and post-secondary students

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Tax Deductions and RRSP Contributions

Income $55,000RRSP Contribution $ 9,900Taxable Income $45,100Taxes Owing $ 7,168

Non-RRSP RRSPIncome $55,000RRSP Contribution 0Taxable Income $55,000Taxes Owing $10,252

As a result of the RRSP contribution, the resident will pay about $3,084 less in current year taxes.

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Tax Deductions and RRSP Contributions

Income $300,000RRSP Contribution $ 24,270Taxable Income $275,730Taxes Owing $109,738

Non-RRSP RRSPIncome $300,000RRSP Contribution 0Taxable Income $300,000Taxes Owing $121,759

As a result of the RRSP contribution, the practicing physician will pay about $12,021 less in current year

taxes.

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RRSPs – Keep in Mind

You can make an RRSP contribution, but you don’t necessarily

have to claim the deduction. It can be applied against future

income.

Be cautious when it comes to over-contributing. The

consequences can be costly!

Understand the taxation implications of withdrawing funds from

your RRSP.

What are your financial goals?

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RRSP Home Buyers’ Plan Borrow up to $25,000 tax-free from an RRSP as a down payment on

a home (buy or build) Must be a qualified “first-time buyer” Each spouse could borrow up to $25,000 from his/her own RRSP 89 day rule Amounts are repaid to the RRSP over a period of 15 years, starting

in year two after withdrawal Investment terms should match withdrawal date(s) Consider carefully and plan ahead

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Tax Free Savings Accounts (TFSA)TFSAs are a relatively new form of tax-assisted savings plan.

Starting in 2013, contribution limit is $5,500/year.

For previous years (2009-2012), the annual limit was $5,000.

Can carry forward unused contribution room indefinitely

No tax deductions for contributions

Investments grow tax-free and funds can be withdrawn tax-free.

Harsh penalties for over-contributions

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RRSPs vs. TFSAsRRSP TFSA

Contribution Room Based on previous year’s earned income

$5,500/year

Unused Contribution Room

Carries forward to future years

Carries forward to future years

Tax Treatment of Contributions

Contributions tax deductible up to allowable limits

Contributions are not tax deductible

Tax Treatment of Investments

Investments grow and generate income tax-free

Investments grow and generate income tax-free

Tax Treatment of Withdrawals

Withdrawals are taxable as income

Funds can be withdrawn tax-free

Termination Date Must be wound up at age 71 No termination date

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Questions for Residents

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The Big Decision

Maximize debt repayment?

Contribute to a RRSP?

Contribute to a TFSA?

A combination of each?

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Discussion Questions

Planning a home purchase

Investing vs. debt repayment

RRSP vs. TFSA

Wills and powers of attorneys

Paying for car purchase

Paying for weddings

Working with a financial advisor and accountant

Incorporation questions

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Next Steps

Upcoming Seminars:

First Time Home Buyers’ Seminar

Thursday April 16 – 6:30 - 8:00 PM

1870 Alta Vista (corner Smyth)

Dinner provided

RSVP: james.pitruniak@cma.ca

Resident Orientations

Across Canada

Resident Resources:

CMA Practice Management Curriculum

http://www.cma.ca/practicemanagement_pmcmodules

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2015 Seminars – Ottawa Region

RRSPs for Residents - January

Tax Tips for Residents - March

First Time Home Buyers - April

Incorporation 101 - May

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Contact Information

James Pitruniak– Early Career Specialist E-mail: james.pitruniak@cma.ca Web Site: www.cma.ca Phone: 1-888-855-2555