2001 Ruling 2001-0090743 - INCOME EARNED BY MEDICAL CORP.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether physicians who are faculty members of university can report revenue earned from clinical practice through their own professional corporations; whether business income would be treated as income from a personal services business; whether income would be subject to CPP or EI deductions; whether income would be attributed to physician under 56(2) or 56(4).

Position: Business income could be reported through a corporation. The corporation would not be considered a personal services business. Subsections 56(2) and 56(4) would not apply to include the business income in the physician's income. The income would not be subject to deductions for CPP or EI.

Reasons: The physician is permitted to earn income from clinical practice which is distinct from his salary as a professor. While the university requires that the physician enter into a XXXXXXXXXX agreement with the university, and appoint the university as his agent to bill and collect the medical fees, it does not control how many patients he sees, or when he sees them. The physician also assumes all the risks associated with his clinical practice. Since there is no legal prohibition against the physician practicing his profession through a corporation, the corporation can carry on the medical business. The facts indicate that the corporation, in this case, will be carrying on the business. Payments made to a corporation are not subject to CPP or EI. Since the income is not considered to be employment income, there would be no personal services business.

XXXXXXXXXX 						2001-009074

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided on XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person,

(ii) being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) under objection by the taxpayer or a related person,

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) the subject of a ruling previously issued by the Directorate;

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein are as defined in the Act unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

FACTS

1) The XXXXXXXXXX (the "University") is a university located in XXXXXXXXXX, which offers undergraduate and postgraduate medical degrees through the College of Medicine and also carries on research through that college. XXXXXXXXXX (the "Physician") is a member of the College of Medicine and is currently employed as a faculty member of the University. His duties are comprised of teaching (including clinical instruction) and performing research. XXXXXXXXXX.

2) The scholarly relationship between the University and the Physician is dictated by the XXXXXXXXXX negotiated between the University and the XXXXXXXXXX that represents and acts on behalf of the faculty members of the University.

3) The XXXXXXXXXX also recognizes that the relationship between the University and the faculty in certain disciplines is unique, including the faculty members of the College of Medicine. Article XXXXXXXXXX sets forth the general rules applicable to allow faculty members to carry on consulting or clinical work provided that it does not affect their ability to fulfill their duties as a faculty member at the University. In particular, Article XXXXXXXXXX provides the approval mechanism for such outside work.

4) Currently, the Physician carries on the practice of medicine as an employee of the University. However, he does not see, diagnose or treat patients within the University, but rather carries out patient care at hospitals that are not owned or operated by the University.

5) The contractual relationship that is established for medical care is between the Physician and the patient. The University and the XXXXXXXXXX Department of XXXXXXXXXX are not parties to this agreement, although the Department of XXXXXXXXXX agrees to pay for such services. As such, if there is non-performance or negligence by the Physician, it is typically the Physician that is sued, not the University.

6) Revenue for clinical services provided by physicians to third party individuals (the "patients") are paid through the University in a number of ways:

a) Fee For Services Basis - The Department of XXXXXXXXXX for the Province of XXXXXXXXXX has established a fee schedule, which compensates a physician based upon the service provided, and having regard to his or her area of practice and specialty. When a physician tends to a patient, the physician will record the details of such visit or attendance and the nature of the services provided and is entitled to submit an invoice or request for payment for such services through the Department of XXXXXXXXXX and to be paid pursuant to the XXXXXXXXXX. These billings will occur in the same manner that any other physician within XXXXXXXXXX will render fees for services performed;

b) Clinical Market Adjustment pursuant to the XXXXXXXXXX Agreement - The University and the Province of XXXXXXXXXX enter into the XXXXXXXXXX Agreement on an annual basis. The XXXXXXXXXX Agreement provides inter alia for a payment of an amount to the University, which amount is paid to those physicians within the College of Medicine who provide clinical services from time to time through the year in recognition of the particular specialty of the physician and the market conditions outside the Province for similar clinical services provided in respect of such specialty. The amount varies from physician to physician and is based upon the specialty and/or sub-specialty of the physician. The XXXXXXXXXX Agreement does not provide any control over the physician who provides such clinical services, nor does the University provide any control over the physician as it relates to the amount of clinical services performed in the particular year or when such services will be performed or how such services will be performed. This amount is payable monthly in even payments throughout the year and will be reviewed as to whether the amount should be increased or decreased for the XXXXXXXXXX year. To the extent that a faculty member chooses to take a sabbatical leave from his or her scholarly work, as permitted pursuant to the XXXXXXXXXX, such individual is not entitled to the clinical market adjustment during such period of leave; and

c) Alternative Payment Basis - The Province of XXXXXXXXXX, through the Department of XXXXXXXXXX may enter into an agreement with the University which provides that a physician or group of physicians shall provide services in respect of a particular specialty. The agreement does not provide any specific rules as to number of patients that must be attended to or the times at which such services must be provided, but rather ensures that there will be coverage and ensures that there will be physicians of the particular specialty available to provide such services.

7) The Physician does not presently receive payment under any alternate billing method at this time.

8) The University has entered into the XXXXXXXXXX Agreement with the Physician, which provides the basis for the payment to the Physician, based on the clinical medical services provided to the patients and the fees resulting therefrom. Pursuant to XXXXXXXXXX, the net payment made to the Physician for clinical medical services provided is outside the XXXXXXXXXX. Nevertheless, this service payment has, in the past, been paid to the Physician as employment income.

9) To facilitate the training of the students, medical residents and graduate students, often when the Physician meets, diagnoses and treats patients, the students, medical residents or graduate students from the College of Medicine are present and observe or participate in the patient treatment process. While the Physician does teach classes (i.e. with formal lectures), he also teaches the students, medical residents and graduate students in the clinical environment.

10) The University and XXXXXXXXXX have entered into agreements to govern the relationship between XXXXXXXXXX and the XXXXXXXXXX as it relates to the efficient operation of both the facilities. The XXXXXXXXXX Agreement sets forth the relationship between XXXXXXXXXX and the University as it relates to, not only faculty and students from the XXXXXXXXXX, but also from other XXXXXXXXXX involved or related to the health care field (i.e.: XXXXXXXXXX). As an adjunct to the XXXXXXXXXX Agreement, XXXXXXXXXX and the University also entered into the XXXXXXXXXX Agreement, which specifically governs the relationship with the University, faculty and students from the XXXXXXXXXX and XXXXXXXXXX.

11) XXXXXXXXXX.

12) On XXXXXXXXXX, Paul Remillard, Acting Director of the CPP/EI Eligibility Division, Canada Customs and Revenue Agency ("CCRA") issued a letter to XXXXXXXXXX confirming that payments made to a corporation would not be subject to source deductions for Canada Pension Plan contributions or Employment Insurance premiums.

PROPOSED TRANSACTIONS

13) The University desires to change its relationship with some of the physicians who are faculty members of the University, including the Physician, in order to either facilitate the incorporation of the particular physician's practice, or to allow the physician individually to carry on the business of providing medical services as a sole proprietor. Similar to the objectives of the Provincial Government, it is anticipated by the University that this change will enhance retention and future recruitment of physicians within the College of Medicine.

14) The University and the Physician will enter into a XXXXXXXXXX Agreement, which will provide the following:

a) Pursuant to XXXXXXXXXX, the Physician may carry on the business of providing clinical medical services (the "medical business"), subject to his complying with the terms of the XXXXXXXXXX Agreement;

b) The Physician will agree to perform his assigned academic responsibilities and the medical business shall not in any way prevent the Physician from meeting such responsibilities;

c) The Physician will agree in writing pursuant to an XXXXXXXXXX Agreement (herein referred to as the "XXXXXXXXXX Agreement") to appoint the University as his agent to perform certain administrative services, including the billing and collecting of medical revenue earned by the Physician for medical services provided through the medical business;

d) The Physician will agree to pay to the University a XXXXXXXXXX fee and XXXXXXXXXX fee, which recognizes the various other costs from which the Physician benefits, but for which he is not directly responsible. By paying this amount, the Physician will be allowed to go out and earn income from the medical business;

e) The university will pay to the physician, on a monthly basis, the revenues collected on behalf of the Physician minus an estimate of the XXXXXXXXXX fee and XXXXXXXXXX fee prorated for the month. This amount will be defined in the XXXXXXXXXX Agreement as the Net Medical Revenue; and

f) The Physician will be entitled to assign his rights in respect of the XXXXXXXXXX Agreement, but notwithstanding any such assignment of all or a portion of the rights and obligations, the Physician will still remain liable for any breaches or non-performance pursuant to the XXXXXXXXXX Agreement.

15) Upon execution of the XXXXXXXXXX Agreement and the XXXXXXXXXX Agreement, the XXXXXXXXXX Agreement will cease to have effect.

16) The terms of employment of the Physician with the University will continue only in regards to the Physician's academic component. For those components, the terms and conditions outlined under the XXXXXXXXXX will continue to apply.

17) The Physician will cause a corporation to be incorporated (the "Medical Corporation") under XXXXXXXXXX. The share capital of the Medical Corporation will include the following shares with the following share characteristics:

a) Class "A" Common Non-Voting Shares - These shares will be entitled to participate in the earnings of the company and to receive pro-rata dividends when and if declared by the directors of the company. Upon wind-up, they will be entitled to share pro-ratably with the Class "B" shares that have been issued in the assets of the company, subject to priority for redemption amount in respect of any of the Class "C" Preferred shares that have been issued;

b) Class "B" Common Voting Shares - These shares will be entitled to vote, participate in the earnings of the company and to receive pro-rata dividends when, and if, declared by the directors of the company. Upon wind-up, they shall be entitled to share pro-ratably with the Class "A" shares that have been issued in the assets of the company, subject to priority for redemption amount in respect of any of the Class "C" Preferred shares that have been issued;

c) Class "C" Preferred Shares - These shares will be non-voting shares that will be redeemable at the option of either the company or the holder. They will not be entitled to participate or receive dividends in respect of the earnings of the company, from time to time, other than they may be entitled to receive a dividend at the discretion of the directors at a rate which shall not exceed the prescribed rate under the Income Tax Act.

18) The Physician will subscribe for and will be issued Class "B" Common Voting Shares of the Medical Corporation.

19) All rights of the Physician to provide clinical medical services to patients or other physicians, and all property owned by the Physician which is required or used by the Physician in carrying out clinical medical services (the "Transferred Assets") will be transferred to the Medical Corporation under the terms of a written agreement to be entered into between the Physician and the Medical Corporation (the "Transfer Agreement").

20) The Transfer Agreement will provide that the Transferred Assets be transferred to the Medical Corporation at a sale price equal to their fair market value, and that the parties elect for the transfer to occur in accordance with subsection 85(1) of the Act. In consideration of the transfer of the Transferred Assets, the Medical Corporation will issue to the Physician a sufficient number of Class "C" Preferred shares, which will have an aggregate redemption value equal to the fair market value of the Transferred Assets. The Transfer Agreement will include a price adjustment clause to adjust the number of shares issued to the Physician if it was determined that the value of the shares issued was not equal to the fair market value of the Transferred Assets. The Physician and the Medical Corporation will elect to transfer the Transferred Assets at an elected transfer price equal to the Physician's tax cost of the Transferred Assets, and the parties will file the required T2057 election form with the CCRA within the time period required for filing that form pursuant to the Act.

21) The Medical Corporation and the Physician will enter into an employment agreement, which will stipulate that the Physician provide clinical medical services to patients and to other physicians as an employee of the Medical Corporation. The employment agreement will also provide that any clinical medical services performed by the Physician will be as an employee of the Medical Corporation, and that the Medical Corporation will be entitled to any and all billings and revenues paid in respect of the provision of such services by the Physician.

22) The rights and obligations of the Physician pursuant to the XXXXXXXXXX Agreement will be assigned by the Physician to the Medical Corporation. The Medical Corporation will also agree to be bound by the terms of the XXXXXXXXXX Agreement as it relates to the provision of certain administrative services by the University, and in particular, the method of billing on a fee for service basis in respect of the attendance by the Physician upon patients on behalf of the Medical Corporation.

23) The Physician will be the sole employee of the Medical Corporation. Support staff and administrative staff may be hired later if there is sufficient need. As many of the administrative services will be provided by the University pursuant to the XXXXXXXXXX Agreement, it is expected that there will be fewer than 6 full time employees of the Medical Corporation at any particular time. The Physician will be the sole director and shareholder of the Medical Corporation.

24) The Medical Corporation will be responsible for the expenses of carrying on the business of providing the medical services, and will receive the revenue generated from these services. For example, bad debts or uncollectible amounts will be the responsibility of the Medical Corporation, and will not be the responsibility of the Physician or the University.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions, from the perspective of the University, is to allow faculty members who are physicians to carry on their medical practices independent from the University, either through a corporation or as a sole proprietor. This change is intended to enhance the University' s ability to retain and recruit physicians within the College of Medicine. From the perspective of the Physician, the proposed transactions will allow the Physician to carry on the business of providing medical services to patients through a corporation.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described in paragraphs 13 to 24 above, our rulings are as follows:

A. The clinical medical services provided by the Medical Corporation through its employee, the Physician, will constitute a business carried on by the Medical Corporation in accordance with the definition of business in subsection 248(1) of the Act.

B. The business activities of the Medical Corporation will not be considered a personal services business as defined in subsection 125(7) of the Act.

C. The Net Medical Revenue (as defined in paragraph 14(e) above) to be paid by the University to the Medical Corporation, pursuant to the XXXXXXXXXX Agreement, will not constitute employment income and therefore, the University will not be required to withhold income tax in respect of such payments pursuant to subsection 153(1) of the Act

D. The business income of the Medical Corporation will not be included in the Physician's income by virtue of subsections 56(2) and 56(4) of the Act.

E. Subsection 245(2) of the Act will not be applied to re-determine the tax consequences of the rulings given above.

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the CCRA provided the transactions are completed by XXXXXXXXXX.

The rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Yours truly

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch