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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: An individual's professional corporation will sell XXXXXXXXXX % of its practice to another professional corporation and the individual will resign from the professional corporation and will carry on the balance of the professional corporation's business as a sole proprietor, can the individual's professional corporation pay the individual a retiring allowance ?
Position: Yes.
Reasons: Based on the particular facts in this case, the employee/employer relationship with the professional corporation ceases and the carrying on of part of the business as a sole proprietorship will not affect this.
XXXXXXXXXX 2000-006045
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Corporation") is a taxable Canadian corporation that was incorporated under the laws of the Province of XXXXXXXXXX. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
The Corporation's address is XXXXXXXXXX. The Corporation's fiscal year ends on XXXXXXXXXX of each year. The Corporation files its tax returns with the XXXXXXXXXX Taxation centre and is serviced by the XXXXXXXXXX Tax Services Office.
2. XXXXXXXXXX (the "Individual") has been the sole shareholder and director of the Corporation since its incorporation. The Individual's social insurance number is XXXXXXXXXX and the Individual has the same address as the Corporation. The Individual started practising as XXXXXXXXXX. The Individual opened his office on XXXXXXXXXX.
3. XXXXXXXXXX.
4. In the past XXXXXXXXXX years, the Corporation opened a second part-time office in XXXXXXXXXX. The Individual serviced this second part-time office.
5. Over the past XXXXXXXXXX years, the Corporation has paid the Individual the following salaries for his services:
XXXXXXXXXX.
The Corporation has never made any contributions to a pension plan or a deferred profit sharing plan on behalf of the Individual.
6. Effective XXXXXXXXXX, the Corporation sold the practice of its XXXXXXXXXX office to XXXXXXXXXX (the "Purchaser"). XXXXXXXXXX has been a colleague of the Individual and the Purchaser has been an employee of the Corporation since XXXXXXXXXX . The terms of the sale included:
(a) The Corporation sold the tangible assets and XXXXXXXXXX.
(b) The Corporation is entitled to a XXXXXXXXXX from the XXXXXXXXXX office's business over the next XXXXXXXXXX years.
(c) The Corporation and the Individual have entered into restrictive covenants not to practice XXXXXXXXXX for the next XXXXXXXXXX years.
(d) The Individual has entered into a Contract for Services with the Purchaser XXXXXXXXXX. Once the transition is completed the Contract for Services will be terminated by the Purchaser. The Individual will be paid for any chargeable time incurred during this transition period.
Proposed Transactions
7. Subsequent to XXXXXXXXXX, the Individual will continue the XXXXXXXXXX currently operated out of the Corporation's XXXXXXXXXX office. The Individual will carry on operations of the XXXXXXXXXX office as a sole proprietor. This business will be operated by the Individual for XXXXXXXXXX. The tangible assets used in the XXXXXXXXXX office will be retained by the Corporation until it is wound up and the Individual will pay the Corporation for its use. There is no significant amount of goodwill attached to the clients serviced by the Corporation's XXXXXXXXXX office.
8. XXXXXXXXXX.
9. The Individual will tender his resignation to the Corporation so that he can reduce his involvement as a practising XXXXXXXXXX in order to devote more time to his family, his recreational XXXXXXXXXX activities and his investments. The Corporation will continue to operate only until all of the amounts have been collected from the Purchaser in respect of the amounts due under the terms of the sale of the operations of its XXXXXXXXXX office to the Purchaser as described in 6 above. Until the final amounts are collected by the Corporation and it is wound up, the Individual will continue as its sole Director for which he may be remunerated fees of $XXXXXXXXXX per year.
10. Subsequent to the Individual's resignation and ceasing to be employed by the Corporation, the Corporation will pay a retiring allowance of $XXXXXXXXXX to the Individual in recognition of his long and distinguished services to the Corporation. The Corporation will pay the retiring allowance prior to XXXXXXXXXX and the amount will be paid directly to a registered retirement savings plan ("RRSP") under which the Individual is the annuitant.
Purpose of the Proposed Transactions
11. The Corporation would like to make a payment to the Individual to recognize his long service and contributions to the operations of the Corporation.
12. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or the Individual or of a person related to either of them;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Corporation or the Individual or of a person related to either of them;
(c) is under objection by the Corporation or the Individual or by a person related to either of them;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Corporation or the Individual.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:
A. The proposed payment described in 10 above will qualify as a retiring allowance as defined in subsection 248(1) of the Income Tax Act (the "Act") and will be included in the Individual's income under subparagraph 56(1)(a)(ii) of the Act in the year the amount is paid to the Individual's RRSP.
B. The Individual will be entitled to a deduction under paragraph 60(j.1) of the Act, to the extent permitted by that paragraph, with respect to the retiring allowance paid to the Individual's RRSP by the Corporation as described in 10 above.
C. For the purposes of section 67 of the Act, the proposed payment of the retiring allowance, as described in 10 above, will be reasonable.
You have not requested an advance income tax ruling with respect to the transfer of the operations of the Corporation's XXXXXXXXXX office to the Individual's sole proprietorship. The determination of the value of the operations of the Corporation's XXXXXXXXXX office is a question of fact. This advance income tax ruling should not be construed as implying that we are in agreement with your views that the operations have no significant goodwill value. In fact, we are of the view that subsection 69(1) may apply to the disposition of the operations of the Corporation's XXXXXXXXXX office to the Individual's sole proprietorship.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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