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Physician groups have been lobbying aggressively to have federal Finance Minister Bill Morneau quash a government plan to tighten up the rules that some corporations use to reduce or defer their taxes. Some specialist groups, such as radiologists, have gone so far as to claim that thousands of doctors will flee the country if the tax break is not maintained.

There are two distinct issues here: First, is the tax loophole that doctors want to keep justified? And, second, how should the government deal with the threats?

Let's deal with the latter first.

There's only one way to respond to blackmail, and that is unequivocally. If doctors are threatening to leave the country unless they get preferential tax treatment, the answer has to be "there's the door."

Read more: Doctors warn thousands could leave for U.S. over new federal tax hikes

Read more: With Trump's tax plan, Ottawa must act to prevent economic exodus: David Dodge

Doctors may well be frustrated – and more on that in a moment – but the constant threats that they're going to take their marbles and go home is tiresome and counterproductive. Not to mention the cold, hard reality that more physicians return to Canada than leave – a net gain of 110 physicians last year. For all the complaints doctors have about Canada, it's no picnic in the United States either.

So let's examine the tax change itself.

First of all, we need to understand it affects only a small percentage of physicians.

About 40 per cent of doctors are either salaried or bill provincial health plans directly and pay income taxes on their pay or net income.

The other 60 per cent of physicians are incorporated, meaning their fees are paid to a numbered company, and that company pays their overhead (office rent, utilities, equipment, salaries, etc.) The tax rate is 15 per cent on monies retained by the corporation, but doctors pay regular income taxes on the salary they are paid by their corporation, up to 46 per cent.

In some instances, physicians form partnerships and their individual corporations sell services to that larger entity. It is only those physicians who are affected by the tax change – roughly 6-10 per cent of the total work force.

These partnerships – called Canadian Controlled Private Corporations – tend to find favour with high-income professions that make significant capital investments, such as radiologists. CCPCs are also used by lawyers, accountants, architects and other high-earners to defer or reduce their taxes.

In Canada, small businesses pay an average tax rate of 15 per cent on income up to $500,000 and about double that rate (depending on the province) when income is higher.

Until now, partners in CCPCs were paying 15 per cent on income up to $500,000 each. The change proposed is that, henceforth, they will split the deduction. In other words, each partner will now get a slice of the deduction pie rather than a whole pie.

The easiest way to understand the impact is with an example: Imagine a partnership of four physicians earning $500,000 each, for a total of $2-million.

If they retained half that amount in the corporation, $1-million, they currently would pay a tax rate of 15 per cent, or $150,000 in total.

But if the small business deduction is split, they would pay 15 per cent on the first $500,000 and 26.5 per cent on the next $500,000, for a total of $207,500 in taxes.

That's an additional $57,500, or $14,375 for each of the four partners.

That seems like a big tax hit, until you consider that the loophole was not supposed to be there in the first place, and there is no sound public policy justification for allowing this tax-avoidance measure.

Physicians in these practices are not being whacked with new taxes; rather, they received an additional tax break for the past few years.

Many physicians in Canada – and Ontario in particular – are angry because provincial governments have frozen or rolled back their fees, and imposed other draconian measures on their practice. Fair enough.

But expecting physicians to pay taxes on their income – even if that income is shrinking – is not in any way onerous or unjust.

If high-earning physicians think they deserve special tax treatment, then let them make that case. But arguing that the CCPC partners should be able to multiply their small business deduction is an illogical, untenable argument.

It's not the hill to die on, and it's certainly not a reason for making idle threats about fleeing Canada because of its onerous tax system.

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