As I eluded to in my prologue post about keeping the sprinkler running, there are still methods of income splitting available to all Canadians and small businesses despite the suggestion that it was only the purview of tax loop-holin’ professional corporation owners. When most people think of income splitting, they are thinking of short-term income splitting.The Minister of Fairness has tried to re-brand it as, “income sprinkling”, to generate visuals of rich, fat-cats dancing around in their fancy socks sprinkling their families with gold dust, money, or lavish trips to private islands. Whoops, that probably wasn’t the intent. Glass house. Stones.
The government clarification of the new income splitting rules specifically addresses giving dividends to spouses. With the new rules, paying a dividend to your spouse is generally not ok. However, if you get divorced and pay him or her spousal support – that is ok. In fact, it is rightfully expected. The spousal support payments are tax deductible by the payer and taxed in the hands of the recipient – Voila! Income splitting. That shows how bizarre this is.
While you could sleep with your billing agent, which would lead to divorce and being able to split your income with your now ex-husband or wife, that is probably not the preferred route. What I am suggesting is that you hire your spouse as your billing agent and continue sleeping with them.
This has several benefits:
- You keep revenue from your business in your family rather than paying it to an outside source.
- If you are able to generate enough work (>20h/wk) with billing and other work for the business, then you could be excluded from the new income splitting rules.
- You may actually bill and recover more.
- Involving your spouse in the business that occupies such a huge part of your life can strengthen your understanding of each other and your relationship.
- Your spouse having their own income lays the foundation for more intermediate-term income splitting strategies.
The double impact of keeping money in the family
Paying your family member not only allows you to redirect income to your household instead of outside parties, it also does so, tax effectively if you have a lower income spouse. For example, if you have a practice that bills $350K/yr. The going rate for a full medical service billing agency in Ontario is 1.5-2.5% of gross billings or $8750/yr in this case. You could use online billing software for about $600/yr, but still need someone to enter the data. That could be your office staff at a reduced cost relative to a full service billing agency, but you still have to pay them for their time. Alternatively, you could pay your spouse to do that billing, and redirect that $8750/yr to your household instead of either an agency or your office staff. Employer/employee CCP & EI costs would be ~$800, leaving ~$8K to channel into your household and be taxed at the lower income spouse’s rate. That could be no tax if they don’t have much other income.
The question in the above case is – how much of your spouse’s time is worth $8K to your household?
That depends on how long the billing takes which depends on how complex your practice is. For example, in my practice, taking the cost for billing divided by the time it takes Mrs. Loonie Doctor to do it, she makes about $120/h pre-tax. Definitely worth it for us. My wife also likes the fact that she is financially contributing to our household, in addition to all of her other contributions.
But, how can this be!?!? You need to pay your spouse a reasonable wage for the work done or it will not count as a business expense if the CRA audits you. That would result in paying corporate tax on the amount plus the personal income tax as punishment. This leads to the next point to consider.
Should you pay an hourly wage or pay the cost you would have to pay an outside agency to do the work?
The wage of a medical billing clerk peaks out at about $22/h around here. To pay a data entry billing clerk through the most popular billing agency that my colleagues use was quoted at $33/h back when I was starting up 12 years ago which would be $40/h accounting for inflation. These hourly rates are still much lower than what my wife makes. However, as I stated above, a full service billing agency charges 1.5-2.5% of gross billings. That agency cost pays the billing clerk, but also other expenses to run their company like management, advertising, infrastructure costs, plus a profit margin for the owners. Also not accounted for is that even if you develop more efficient ways of processing billing, you would still pay the same to an agency, despite it taking them less time.
We pay my wife the amount that it would cost us to purchase the service from an outside source. She provides full service billing to my practice. In fact, I get premium service as I will describe later in the post. We have also become very efficient at capturing and processing billable services. That efficiency goes to our bottom line rather than someone else’s.
Billing is the low hanging fruit for a medical practice and an example where paying the cost for comprehensive service rather than an hourly wage to your spouse usually makes the most sense. Furthermore, there are also a number of other ways that your spouse can work for the corporation and legitimately get paid. For example, my wife also provides admin support for the non-clinical income generating aspects of my practice (I have significant roles in physician education and leadership). She also manages the finances of our practice. In our case, it could reasonably cost us $40-60K/yr to hire outside agencies to provide all of these services and that is money that I redirect to my spouse instead. I will give a full job description of what she does in a later post.
Depending on the total volume of work that they do, it can sometimes make sense to pay them an hourly wage instead. If you are able to have them work over 20h/wk consistently, then you would be an “Excluded Business” from the proposed income splitting legislation and should be able to give your spouse dividends in addition to salary to income split. You would need to keep careful time sheets and payroll records to prove the hours worked, as it will become a question of fact in an audit. In our case, for years we have paid my wife based on task instead of time and that has resulted in her becoming extremely efficient. With the new rules, I keep trying to convince her to be less efficient to see if she could hit 20h/week, but she refuses. It is against her nature to slow down or slack off. When she worked outside of our business, she used to draw the ire of her colleagues because of this attitude. It is hard to come by that type of motivated employee.
No employee is going to be as motivated as your spouse to see that you get paid properly.
This is extremely important when it comes to medical billing. The medical schedule of benefits is convoluted and there are all sorts of hoops to jump through to get paid for providing medical services. Jumping through those hoops requires effort and teamwork from you and your billing agent, but can make a big difference to what you make. For example, tracking down a referring physician name and written request for consultation can mean getting paid either $150 or $30-$75 for providing the same service. Taking the time to check the previous diagnoses billed for and choosing a different one when you see the same patient for a different problem has similar effects.
There are also many services for which the government will only pay one person, even if multiple physicians are involved, and it is first come – only one paid. The other physicians get their billing rejected, and our provincial plan won’t even tell them who the person paid was eliminating the opportunity for you to be able to discuss and work it out with each other. I have same day or real-time billing submission via my spouse and this problem does not happen to me very often. This is premium service.
Does a motivated billing agent matter? Definitely. I gave a couple of examples above, but there are multiple billing code options for the same patient and the easiest route to bill is always the lowest paying one for you. I openly discuss billing with my colleagues and even though we have similar practice styles, I usually collect 5-10% more per week of service than the average. It appears to be due to a combination of fewer downgrades in codes and fewer rejections. On the extreme end of the spectrum, one of my mentors when I was a resident found a drawer in her secretary’s desk filled with unsubmitted billings that had staledated. This cost her about $50K! Her secretary, who was supposed to be doing the billing, merely got moved to another physician (it was a unionized environment) and my mentor learned an expensive lesson. The premium service provided by my wife results in enough more collected billings that it offsets what I pay her for doing it. Plus that income gets kept in the family in a lower tax bracket! Win-Win for us. Wynne – Lose for the government.
Having my spouse involved in my practice has benefited our relationship.
If possible, my wife does not go near hospitals. She thinks they are germy and gross, and she has little interest in medical science. These factors made it hard for her to identify with me in my job.
However, she does get insight through working for our practice. She can tell by the pile of billings after a night on call why I may be tired and a bit cranky. She’ll see the billings for a two hour resuscitation on a 30 year old, followed by the codes for pronouncement of death, and empathize with me. A professional career can be consuming and hard for people outside of it to relate to, but drawing your partner in to share some of that in a small way can be a supportive move. It may not apply to everyone, but for us it has helped strengthen our relationship.
Paying your spouse can open the door to further income splitting opportunities.
Many of the intermediate-term income splitting techniques require your spouse to have their own money that they have earned and kept in a separate personal account. They can use it to build income generating assets in their name that are taxed in their hands without running afoul of the attribution rules.