Transition to
Residency
Planning, Saving, Preparing
March 31, 2015
uOttawa
James Pitruniak, Early Career Specialist
1
Agenda
 Financial Planning 101
 Debt Management
 Credit Management
 Tax Planning for Residents
 Saving and Investing
 Questions for Residents
2
Financial
Planning 101
3
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
4
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
5
Net Worth Statement
Assets - Liabilities = Net Worth
 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.
6
PGY2 Net Worth Statement
7
Cash Flow Statement
Money In
(Revenue)
 At the end of each month,
what’s left over: + or – ?
 Important to generate + cash
flows to grow net worth
Money Out
(Expenses)
 Current cash flow and debt
(NOW) will affect your
finances in residency and
practice
8
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
9
Sample Resident Cash Flow
Source 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?
10
Debt
Management
11
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
12
You Need to Know…
What happens to your line of credit when you finish residency?

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.
13
The Impact of Interest
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%
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.
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Loan Consolidation
Not Consolidated
Student loan: $50,000
Consolidated Loan to LOC
 Interest rate: Prime + 2.5%
 Interest rate: Prime
 Loan amortization: 9.5 yrs
 Monthly interest payment: $325
 Monthly interest + principal
 Cash flow increases by about $527
payment: $652
LOC balance: $130,000
per month with consolidation!
Line of Credit: $80,000
 Interest rate: Prime
 Monthly interest payment: $200
 Total Monthly Debt Payments
(not consolidated): $852
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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 CanadaOntario 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 Consolidation
Assuming 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
Scenario Assumptions
•
The prime rate will remain constant at 3% for the next five years.
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 = $133,572
Total interest charges after five years = $21,572
20
Scenario 2: Loan Forgiveness
Scenario 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.
21
Scenario 2: Loan Forgiveness
Line 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
Loan
Repayment
$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 = $115,018
Total 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
22
Comparing Outcomes
Scenario 1: Consolidate
Total debt outstanding after five years = $133,572
Total interest charges after five years = $21,572
Scenario 2: Student Loan Forgiveness
Total debt outstanding after five years = $115,018
Total interest charges after five years = $22,312
Conclusion
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.
23
Credit
Management
24
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.
25
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.
27
Tax Planning
for Residents
28
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
PGY9
$83,704
$88,188
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Ontario Tax Rates
Marginal
Tax 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%
Taxable Income
$
31
Tax Deductions vs. Tax Credits
Deduction
Credit
 A reduction in your taxable income
 A “write off”
 A reduction in taxes owing
 Use applicable federal and provincial
% amounts to calculate savings
Example:
Example:
Earn salary income of $60,000/year… Qualify for a $1,000 tax credit
Qualify for a $1,000 tax deduction
Multiply by 15% federal, 5.05% Ontario
Taxable income reduced to $59,000
Reduce taxes owing by ~ $200
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Deductions and Credits for Residents
Deductions




Moving expenses
RRSP contributions
Professional or union dues
Childcare expenses
Credits
 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…
33
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
34
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
35
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.
36
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.
37
Saving and
Investing
38
Registered Investment Accounts
RRSPs, TFSAs, RESPs
Investment
Accounts
Assets
GICs, Stocks, Bonds,
Managed Products
Dividends, Interest, Capital
Gains
Investment
Income
39
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.
40
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
41
Tax Deductions and RRSP Contributions
Income
RRSP Contribution
Taxable Income
Taxes Owing
$55,000
0
$55,000
$10,252
Income
RRSP Contribution
Taxable Income
Taxes Owing
$55,000
$ 9,900
$45,100
$ 7,168
As a result of the RRSP contribution, the resident will
pay about $3,084 less in current year taxes.
42
Tax Deductions and RRSP Contributions
Income
RRSP Contribution
Taxable Income
Taxes Owing
$300,000
0
$300,000
$121,759
Income
RRSP Contribution
Taxable Income
Taxes Owing
$300,000
$ 24,270
$275,730
$109,738
As a result of the RRSP contribution, the practicing
physician will pay about $12,021 less in current year
taxes.
43
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?
44
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
45
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
46
RRSPs vs. TFSAs
RRSP
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
47
Questions for
Residents
48
The Big Decision
 Maximize debt repayment?
 Contribute to a RRSP?
 Contribute to a TFSA?
 A combination of each?
49
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
50
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
51
2015 Seminars – Ottawa Region
 RRSPs for Residents - January
 Tax Tips for Residents - March
 First Time Home Buyers - April
 Incorporation 101 - May
52
Contact Information
James Pitruniak– Early Career Specialist
 E-mail: james.pitruniak@cma.ca
 Web Site: www.cma.ca
 Phone: 1-888-855-2555
53