28 June 2001 External T.I. 2001-0067935 - IND. MEMBERS OF A PARTNERSHIP INCORP.

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: Whether incorporation by each individual member of a partnership could result in the corporations being personal services businesses (PSB).

Position: no - If Aco did not exist then it would not be reasonable to conclude that individual 'A' is a employee or officer of XYZ partnership since individual 'A' would be a partner of XYZ partnership.

Reasons: ITA 125(7) PSB definition

XXXXXXXXXX 	2001-006793
		Shaun Harkin, CMA
June 28, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Subsection 125(7) - Personal Services Business

This is in reply to your letter of January 23, 2001, regarding personal services business ("PSB").

You asked whether Aco and Bco could be subject to the PSB rules in the following hypothetical situation:

1. XYZ carries on active business as a partnership in Canada.

2. XYZ has two partners, 'A' and 'B', who share equally in the profits of the partnership. 'A' and 'B' are not related.

3. A and B each form a corporation, Aco and Bco, the shares of which they each wholly own.

4. A and B then transfer their respective partnership interests into their own corporations on a tax free basis, taking back as consideration shares of Aco and Bco.

5. Aco and Bco then continue to carry on the operating business as a corporate partnership, so that each corporate partner receives a share of partnership profits. Each owner-manager will have the power to determine the salary-dividend distribution out of his or her own corporate vehicle, and need not be concerned with the remuneration package of the other. Both A and B will be paid salaries and/or dividends from their respective holding company.

Our Comments

Pursuant to the definition of a PSB in subsection 125(7) of the Income Tax Act (the "Act"), one criteria necessary in order for a corporation to be considered a PSB is that an individual who performs services provided to another person or partnership on behalf of the corporation would, if it were not for the existence of the corporation, reasonably be regarded as an officer or employee of the entity to which the services were provided.

It is our opinion that it would not be reasonable to conclude that either individual 'A' or 'B' is an employee or officer of XYZ partnership since the relationship of A and B with XYZ partnership would be that of partner and not employee. Therefore, in the situation described, neither Aco nor Bco would be subject to the PSB rules.

However, depending on the existence of any other relevant facts, other provisions of the Act [eg. 245(2)] may have application.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide and opinion.

We trust the above comments are of assistance.

Yours truly,

Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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