Partnership or Sole Proprietorship Taxes
Generally speaking, business income consists of revenue acquired from activities conducted for profit, or with reasonable expectation of profit. For midwifery practice groups, business income consists of all revenue or income that the practice group receives in the fiscal period they are earned or incurred regardless of when payment takes place.
Sharing Profits and Loses
Partners should discuss and agree in advance how to split and manage the practice group’s profit or loss through a partnership agreement. Any profit earned by the practice must be split among the partners and declared as income on their individual tax returns. Profit may result, for example, when there is a surplus of funds from the fixed portion of a billable course of care after expenses are paid, leasing office space, or revenue from prenatal classes. In turn, all practice group expenses are also shared by the partners. For a complete list of possible business expenses, see Chapter 3 of CRA’s publication, Business and Professional Income.
Filing a Return
A partnership or sole proprietorship does not pay income tax. Instead, the partnership is required to allocate profits (or losses) to each partner, who pays their personal income tax on this allocated amount. Partners and sole proprietors must report their share of the practice group’s profits on their individual tax return.
Additionally, partnerships must file a T5013 Partnership Return within 90 days of the partnership year end if the total of partnership revenue AND expenses is $2 million or more, regardless of the number of partners in the practice. For example, an MPG with total revenue of $2,000,000 would add its expenses of $2,000,000 (including insurance premiums, compensation paid to midwives and benefits payments) for a total of $4,000,000.
T5013 return includes, a balance sheet, income statement and a partnership profit allocation schedule. Additionally, partners receive a T5013 information slip showing their allocation of the profits to send in with their individual income tax return.
MPGs that are either a partnership or sole proprietorship, but are not required to file T5013 Partnership Returns, must complete the T2125 Statement of Business or Professional Activities by March 31; penalties for late filing apply. Partners and sole proprietors will complete two separate T2125 forms; one to report the business’ income and expense, the other to report personal income and expense.
Confirmation of Worker Income
Employees, such as practice administrators, are subject to various payroll deductions, including income tax, CPP and employment insurance (EI). Employers must provide employees with a T4 slip annually, which are due on February 28th.
Independent contractors, such as midwives and most second attendants do not receive a T4 slip. Practices may consider issuing T4A slips or another annual compensation report (e.g., a letter) to document compensation paid throughout the calendar year. The statement should include a reminder that midwives must include the contributions they have made to the AOM Benefits Trust program as income on their personal income tax return.