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Family Physician, 29, Wants To Avoid Debt

case study of Dr. B

When Dr. B graduated from medical school in 2009, the young physician from Quebec faced many of the same issues as her cohorts: Pay off medical school debt or start investing? Rent or buy? Have a baby while a resident or later?

Dr. B was glad she had somewhere to turn for help with these big life decisions. She had begun working with an MD Advisor when she joined the Canadian Medical Association in medical school. The focus had always been to define Dr. B’s financial goals and determine the right strategies to achieve them.

My advisor respected the fact that I’m uncomfortable with debt so we prioritized debt repayment over saving and investing.

Dr. B’s Profile

Age: 29

Area of practice: General practitioner

Province: Quebec

Marital status: Married with 1 child

Issue: Decisions around debt, home and child

Dr. B’s gross annual income: $345,000

Spouse’s gross annual income: $45,000

Approximate annual disbursements: $100,000

Assets: RRSPs/investments, $102,000; home, $420,000; corporation, $278,000. Total: $800,000

Liabilities: Mortgage, $315,000; spouse’s student loan, $11,000

During medical school, for instance, Dr. B followed a budget developed by her advisor and limited her spending to avoid getting into debt. “My advisor had warned me against the easy access to credit,” she says. “So I paid attention to debt and was very careful throughout those years.”

Fortunately for Dr. B, she didn’t need to borrow much money. Her grandparents had set up an MD account for her and invested in MD funds when she was little, and this paid for the bulk of her medical school costs. As a former physician and an MD client, her grandfather was entitled to open accounts for family members.

Dr. B also earned extra money by working summers in research labs and, in the end, she only needed to borrow $20,000 for medical school.

Following medical school and a two-year residency, Dr. B began working as a general practitioner at a regional hospital in a small town northeast of Quebec City in 2011.

Though her debt was relatively small, she was eager to pay it off. “My advisor respected the fact that I’m uncomfortable with debt,” she says, “so we prioritized debt repayment over saving and investing.”

How Incorporating Helps During Maternity Leave

In the early years of practice, Dr. B met her spouse, a teacher at the local college. Like many young couples, they had dreams of buying a home and starting a family.

Before pursuing those goals, however, Dr. B’s advisor wanted her to consider a strategy that would improve the couple’s cash flow management in the future: incorporating her medical practice.

Incorporating helps physicians minimize taxes in two ways: by deferring taxes on the funds in the corporation, and by splitting income with family members.

Based on an analysis of Dr. B’s financial situation, her advisor—working with the MD ExO® team—concluded that incorporating would be worth her while. Dr. B could not only split income with her spouse, but could also vary the income to be drawn from the corporation year to year, depending on the situation.

A year after her corporation was set up, the couple finally bought their $420,000 dream home with money that Dr. B had saved in a personal account since residency, representing 20% of the down payment.

“I actually wanted to put more than 20% down because I really don’t like debt,” she says. “But my advisor suggested that I set aside the extra money for RRSP contributions and home renovations, and in preparation for maternity leave.”

This turned out to be sage advice. The couple became parents in early 2015 and discovered how much a baby could impact their budget, particularly with Dr. B (the primary earner) taking time off work.

In Quebec, the parental insurance plan gives parents a choice: they can receive a lower benefit for a longer period (“the basic plan”) or a higher amount for a shorter period (“the special plan”).

Dr. B’s advisor explained how best to maximize the benefits, using the corporation to split income, and recommended that they divvy up the longer leave (30 weeks for Dr. B and 25 weeks for her spouse) at a lower income replacement rate.

In a typical year, Dr. B makes about $345,000, which is deposited into her corporation. In 2015, because of her maternity leave, she will have no earned income (aside from government benefits) in the first six months.

Based on discussions with her advisor, Dr. B decided to draw about $100,000 in salary from the corporation between August and December 2015, with her spouse receiving dividends of $25,000. This strategy aims to maximize their government benefits, while reducing their taxes.

Thanks to planning ahead of time with her advisor, Dr. B thinks she will be able to get through this year on less income, while avoiding debt. Future maternity leaves may be more challenging but she is hopeful that maintaining a tight budget and income splitting through her corporation will help.

“I wouldn’t be where I am today without my MD Advisor and the whole MD team,” says Dr. B. “I’m confident that the decisions they steered me toward have been in my best interest.”

1 The “basic plan” is 18 weeks for maternity leave, 5 weeks for paternity leave and 7 weeks for parental leave—all at 70% of an individual’s income, and another 25 weeks for parental leave at 55%, up to maximum insurable earnings of $70,000 for 2015. The “special plan” is 15 weeks for maternity leave, 3 weeks for paternity leave and 25 weeks for parental leave—all at 75% of an individual’s income, up to maximum insurable earnings of $70,000 for 2015. Source: QPIP Benefits: Summary Table.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or Canadian non-residents, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit MD Financial Management Inc. provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. MD Financial Management Inc. is owned by the Canadian Medical Association.