2001 Ruling 2001-0080983 - INCORP. A PARTNERSHIP

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 the professional corporation that is the result of the incorporation of a XXXXXXXXXX partnership is a personal services business?

Position: No, if it is not reasonable to regard the Senior Partner that is carrying out services through a Contracting Company as providing those services to NewCo in his/her capacity as an employee or officer of NewCo, but for the existence of the Contracting Company.

Reasons: Reading of the definition in subsection 125(7) and similar rulings were given in files #2000-006120, 2000-0034813 and 9915403.

XXXXXXXXXX 				2001-008098

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX (a partnership) - XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling and your facsimiles dated XXXXXXXXXX.

DEFINITIONS

In this letter the following definitions are used:

"Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;

"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

"CCRA" means the Canada Customs and Revenue Agency;

"Contracting Company" means any company that will be incorporated for the benefit of any individual Senior Partner as a XXXXXXXXXX corporation according to the rules and regulations of XXXXXXXXXX. These companies will enter into contractual relations with NewCo to carry on the XXXXXXXXXX, as contemplated in Paragraphs 17 to 20 and 22 to 24;

"Junior Partner" means an associate partner of the Partnership as contemplated in Paragraph 4;

"NewCo" means the corporation to be incorporated, as described in Paragraph 6;

"Paragraph" refers to a numbered paragraph in this letter;

"Partners" refers to Senior Partners and Junior Partners, unless specifically preceded by the word "Senior" or "Junior";

"Partnership" refers to the existing partnership of XXXXXXXXXX;

"Practice" means the professional practice of XXXXXXXXXX currently carried on by the Partnership, providing various XXXXXXXXXX services, including but not limited to XXXXXXXXXX;

"Professional" refers to each individual XXXXXXXXXX who currently provides professional services to the Partnership as required in the Practice, whether as a Senior Partner or a Junior Partner, as an employee of the Partnership, or as an independent contractor;

"Senior Partner" means a senior partner of the Partnership as contemplated in Paragraph 3; and

"Taxable Canadian corporation" has the meaning assigned by subsection 89(1).

FACTS

1. The Partnership is a partnership of XXXXXXXXXX. There are also a number of self-employed XXXXXXXXXX who provide various professional XXXXXXXXXX services to the Partnership, but are not Partners. The taxpayers that are applying for this advance income tax ruling are all of the Partners (see Appendices A & B). The Partnership files its returns with the XXXXXXXXXX Tax Services Office.

2. The Partners and self-employed XXXXXXXXXX provide various XXXXXXXXXX services, including, but not limited to the following: XXXXXXXXXX.

3. The Senior Partners are bound by the terms of a written partnership agreement that was signed on XXXXXXXXXX, effective XXXXXXXXXX (the "Senior Partnership Agreement") and by the terms of a subsidiary agreement that details the rights and obligations of the Junior Partners (the "Junior Partnership Agreement" - see Paragraph 4). The key terms of the Senior Partnership Agreement include the following:

(a) The Partnership is comprised of Senior Partners and Junior Partners. Presently there are XXXXXXXXXX Senior Partners and XXXXXXXXXX Junior Partners;

(b) Senior Partners must sign the Senior Partnership Agreement to become a Senior Partner. By signing the Senior Partnership Agreement, the Senior Partner accepts and is bound by all the terms of the agreement;

(c) There is a "Management Committee" appointed by the Partnership. It is the duty of the Management Committee to manage the affairs of the Partnership. It is made up of XXXXXXXXXX Senior Partners. Each member is appointed to serve a XXXXXXXXXX term;

(d) Each Senior Partner is entitled to one vote, regardless of the number of years they have been a Senior Partner or whether or not they are part of the Management Committee. Junior Partners are not entitled to attend or vote on matters at Senior Partnership meetings;

(e) Each Senior Partner's share of the profits of the Partnership is based upon a number of different factors. For example, whether or not the Senior Partner is XXXXXXXXXX impacts his or her allocation of income because XXXXXXXXXX;

(f) The Management Committee has the sole right to allocate XXXXXXXXXX% of the profits of the Partnership amongst the Partners or any other individual providing services to the Partnership in any manner they see fit and the allocation will be final and binding upon all of the parties;

(g) Partnership profits are paid in the form of monthly distributions to each of the Senior Partners. XXXXXXXXXX There are periodic reviews to see if based upon their current year's work (XXXXXXXXXX) it appears that they are receiving more than what their annual current year's earnings will be. If so, their monthly distributions will be adjusted at that time. As well, at the equalization time (which is XXXXXXXXXX ) if an overage is calculated, the Senior Partner has XXXXXXXXXX in which to repay the overage. If the Senior Partner does not repay the overage within XXXXXXXXXX then he or she is required to pay interest at a rate of prime plus XXXXXXXXXX% on the outstanding balance. This information is reviewed on a monthly basis;

(h) The Partnership also engages independent contractors. These independent contractors are not part of the Partnership and they are paid XXXXXXXXXX% of their service billings;

(i) Individuals who are Senior Partners are entitled to XXXXXXXXXX of consecutive sick leave each year. The Senior Partners receive full income support during this time. At equalization time of the Partnership (XXXXXXXXXX) the allocation of the fixed overhead costs are waived for these individuals. If they do not use up these sick days in any given year these days are lost and do not cumulate over time;

(j) Individuals who are Senior Partners are entitled to XXXXXXXXXX of maternity or paternity leave. During this leave they are entitled to their full income support as discussed in point i above. At equalization time of the Partnership (XXXXXXXXXX) the allocation of the fixed overhead costs are waived for these individuals;

(k) Individuals who are Senior Partners may take XXXXXXXXXX leave each year to attend conventions or for undertaking postgraduate work;

(l) Each Senior Partner that is an individual and that has less than XXXXXXXXXX with the Partnership is entitled to XXXXXXXXXX of paid vacation each year. Each Senior Partner that is an individual and has at least XXXXXXXXXX with the Partnership is entitled to XXXXXXXXXX of paid vacation each year. The Senior Partner's holiday time is non-cumulative;

(m) A Senior Partner who is an individual and has at least XXXXXXXXXX with the Partnership may retire, by reason of disability or ill health, or voluntarily withdrawal from the Partnership, the Partnership will pay that Senior Partner, or his or her Estate, retirement benefits for a period of XXXXXXXXXX. The retirement income is equal to approximately XXXXXXXXXX% of the Senior Partner's average income for the previous XXXXXXXXXX. If a Senior Partner that is an individual retires prior to having XXXXXXXXXX, then after having XXXXXXXXXX, they are entitled to benefits on a graduated rate;

(n) All of the Partners are residents of Canada; and

(o) XXXXXXXXXX are related to each other as husband and wife. None of the remaining Partners are related to any other Partner within the meaning of subsection 251(2).

4. Each Junior Partner is also bound by the terms of the Senior Partnership Agreement and the Junior Partnership Agreement. The key terms of the Junior Partnership Agreement include the following:

(a) The Junior Partners must sign the Junior Partnership Agreement to become a Junior Partner. By signing the Junior Partnership Agreement, the Junior Partner accepts and is bound by all the terms of the agreement;

(b) There is a Management Committee appointed by the Partnership. It is the duty of the Management Committee to manage the affairs of the Partnership. It is made up of XXXXXXXXXX Senior Partners. Each member is appointed to serve a XXXXXXXXXX term;

(c) Each Junior Partner is entitled to attend and vote at all Junior Partner meetings. Each Junior Partner is entitled to one vote, regardless of the number of years they have been a Junior Partner;

(d) Each Junior Partner's share of the profits of the Partnership is based upon a number of different factors. XXXXXXXXXX;

(e) The Management Committee has the sole right to allocate XXXXXXXXXX% of the profits of the Partnership amongst the Partners or any other individual providing services to the Partnership in any manner they see fit and the allocation will be final and binding upon all of the parties;

(f) Partnership profits are paid in the form of XXXXXXXXXX distributions to each of the Junior Partners. The XXXXXXXXXX distribution is based upon whether or not they are a XXXXXXXXXX, and so on. At the equalization time (which is XXXXXXXXXX ) if an overage or an underage is calculated (XXXXXXXXXX), their allocation of the net profits of the Partnership will be adjusted accordingly;

(g) Junior Partners are entitled to XXXXXXXXXX of maternity or paternity leave. During this leave they do not receive their drawings;

(h) Junior Partners may take XXXXXXXXXX leave each year to attend conventions or for undertaking postgraduate work; and

(i) Each Junior Partner is entitled to XXXXXXXXXX of paid vacation during each year as a Junior Partner.

5. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling

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

(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer(s) or a related person,

(c) is under objection by the taxpayer(s) or a related person,

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

(e) is the subject of a ruling previously issued by Revenue Canada or the CCRA.

PROPOSED TRANSACTIONS

6. (a) NewCo will be incorporated under the laws of the Province of XXXXXXXXXX, being authorized to issue an unlimited number of Class A common shares without nominal or par value. Upon incorporation, Newco will issue one Class A common share of NewCo to the Partnership for future consideration (see Paragraph 7). NewCo will be a Canadian-controlled private corporation and a taxable Canadian corporation.

(b) Each Senior Partner who incorporates a Contracting Company to provide XXXXXXXXXX services (see Paragraph 13) will have the Contracting Company XXXXXXXXXX.

7. XXXXXXXXXX, the Partnership will sell all of its assets (the "Assets" - these are all described in subparagraphs 85(2)(a)(i) through (iii) inclusive) at fair market value to NewCo. In return NewCo will give the Partnership XXXXXXXXXX of its Class A common shares (including the one Class A common share issued upon incorporation, referred to in Paragraph 6(a)), NewCo will assume the Partnership's debts, and NewCo will issue to the Partnership a demand non-interest bearing promissory note (the "Promissory Note"). The amount of the Partnership's debt assumed by NewCo and the amount of the Promissory Note will be equal in total to the Partnership's cost amounts of the Assets. NewCo and all of the members of the Partnership will jointly elect pursuant to subsection 85(2), in prescribed form, and within the time permitted by subsection 85(6). The agreed amounts for each Asset (or group or class of Assets) in respect of such election will not be less than the least of the amounts specified in subparagraphs 85(l)(c.1)(i) and (ii), 85(1)(d)(i), (ii) and (iii), 85(1)(e)(i), (ii) and (iii), and will not exceed the respective fair market value of each Asset (or group or class of Assets), nor will they be less than the amount permitted by paragraph 85(l)(b).

8. On the day immediately following the sale of the Assets to NewCo, the Partnership will wind up its affairs. Prior to this wind up, each Junior Partner will receive, in complete satisfaction of his or her interest in the Partnership, a pro rata share of the Promissory Note, based on his or her respective interest in the Partnership. Thereafter and immediately before the winding-up, the Partnership will have no assets other than property received from NewCo as consideration for the sale of the Assets referred to in Paragraph 7. Specifically, the only property in the Partnership will be the XXXXXXXXXX Class A common shares of NewCo and the residual of the Promissory Note (after the pro rata distribution of a portion of the Promissory Note to the Junior Partners).

Upon the winding up of the Partnership, each Senior Partner will receive, in complete satisfaction of his or her interest in the Partnership, one Class A common share of NewCo and a pro rata share of the Promissory Note, based on his or her respective interest in the Partnership.

9. In accordance with paragraph 2 of Interpretation Bulletin IT- 378R, Winding-up of a Partnership ("IT-378R"), dated February 15, 1980, and for legal simplification and administrative ease

(a) the XXXXXXXXXX Class A common shares issued by NewCo on the sale of the Assets, as outlined in Paragraph 7, shall be issued in the names of the Senior Partners, instead of in the name of the Partnership, so that each Senior Partner will have one Class A common share of NewCo issued in his or her name, and

(b) the Promissory Note issued by NewCo on the sale of the Assets, as outlined in Paragraph 7, shall be issued in the names of the Partners, on a pro rata basis in accordance with his or her respective interest in the Partnership, instead of in the name of the Partnership.

It is the intent of NewCo, the Partners and the Partnership to have the Class A common shares of NewCo and the Promissory Note beneficially owned by the Partnership and not by the individual Partners themselves at the time of issue. It is also intended (as further indicated in paragraph 2 of IT-378R) that this procedure will not invalidate the application of subsection 85(2) or the subsequent application of subsection 85(3).

10. The shareholders of NewCo will elect the directors for the corporation. It is anticipated that each shareholder of NewCo will be a director. Its shareholders will elect the officers of NewCo, including the President, Vice-President, Secretary and Treasurer. These officers will be paid a reasonable salary for the services they provide to NewCo.

11. A "Shareholders' Agreement" will be established and signed by all of the shareholders of NewCo. It will create the main rules that will exist between the shareholders and NewCo. It will provide, but not be limited to the following:

(a) The business of NewCo will be the Practice;

(b) NewCo will carry out its professional services by contracting with independent contractors, employees, locums and so on as discussed in more detail in Paragraph 12;

(c) Each individual shareholder of NewCo may, if he or she requests, be a member of the board of directors of NewCo;

(d) The President, and other officers of NewCo, will be elected by the shareholders of NewCo;

(e) At the sole right of the elected officers of NewCo, the net profits of NewCo will be available for distribution annually in the form of dividends on the outstanding shares, as well as in the form of director's fees; and

(f) The change in the ownership of the issued shares of NewCo shall be limited to the following situations:

(i) A shareholder has the right, at any time, to demand that NewCo purchase his or her shares at the fair market value at that particular time;

(ii) NewCo may, upon approval of XXXXXXXXXX % of its existing shareholders, purchase any shares that are held by any of its shareholders and those shares will be sold to NewCo for their fair market value at that particular time; and

(iii) Fair market value for points (i) and (ii) above will be determined by a mutually agreed upon independent third party.

12. NewCo will conduct its Practice by providing professional services in the following ways:

(a) Through individuals employed by NewCo to provide XXXXXXXXXX, receptionist, filing and other secretarial services;

(b) Through individuals who are XXXXXXXXXX, employed by NewCo to provide such services;

(c) Through individuals who are XXXXXXXXXX, engaged by NewCo as independent contractors to provide such services on behalf of NewCo;

(d) Through companies XXXXXXXXXX engaged by NewCo as independent contractors to provide services on behalf of NewCo such as XXXXXXXXXX; and

(e) Through XXXXXXXXXX, which is a Senior Partner and was incorporated in the Province of XXXXXXXXXX, engaged by NewCo as an independent contractor to provide certain administrative services [such as payroll, etc.] on behalf of NewCo, but not to provide any XXXXXXXXXX professional services.

13. Each Senior Partner, other than XXXXXXXXXX, will have the choice of providing professional XXXXXXXXXX services to NewCo by (i) entering into an employment agreement with NewCo, (ii) entering into a contract as an independent contractor, or (iii) forming a XXXXXXXXXX corporation (a "Contracting Company" as referred to in the Definitions section of this letter) to enter into a contract to provide services as an independent contractor with NewCo.

As noted in Paragraph 12(e), XXXXXXXXXX will enter into a contract with NewCo to perform administrative services to NewCo as an independent contractor. For greater certainty, XXXXXXXXXX will not be a Contracting Company.

Other professionals that are required by the XXXXXXXXXX practice may provide services under such terms and arrangements that are agreed upon by NewCo.

14. The professionals that choose to enter into an employment arrangement with NewCo will be required to sign a written employment agreement. This employment agreement will provide, but not be limited to, the following conditions:

(a) NewCo will provide a detailed position description and control the duties that the employee would be required to perform. As well, NewCo will provide the employee the information on whom the employee will report to and have their performance evaluation conducted by;

(b) Upon completion of XXXXXXXXXX probationary period, assuming that the employee has satisfactorily met all of NewCo's requirements, the period of employment would continue indefinitely until either NewCo or the employee terminated the employment contract. Either party would have to provide the other party with at least XXXXXXXXXX written notification of the termination of their contract;

(c) The employee will be paid an annual salary, which will be determined each year during the employee's annual review process. NewCo will pay the employee on a monthly, semimonthly or biweekly basis, and will withhold source deductions, specifically, income taxes, employment insurance premiums and Canada pension plan contributions;

(d) NewCo will be responsible for paying all professional expenses related to the employee's services, including but not limited to the following:

(i) professional membership fees and dues;

(ii) professional insurance;

(iii) travel expenses, including motor vehicle, accommodations and meal expenses;

(iv) professional development courses or seminars that NewCo requires the employee to participate in; and

(v) any entertaining expenses that NewCo requires the employee to incur;

(e) NewCo will provide all tools, equipment, instruments, books and supplies that are necessary to the employee to carry out their terms of employment;

(f) The employee is entitled to a reasonable number of compassionate days as determined by the directors of NewCo;

(g) The employee is entitled to XXXXXXXXXX during the year. These days are used for short-term disability and long-term disability is available after XXXXXXXXXX;

(h) An employee's vacation entitlement each year is dependent upon the number of years of service that they have provided. Employees are eligible for XXXXXXXXXX; and

(i) An employee will consent to not compete with NewCo during the term of employment and for a period of XXXXXXXXXX thereafter. The employee will work exclusively for NewCo. If the employee wishes to perform services for any other party, they must receive written permission from NewCo, the fees will be paid to NewCo and then the employee will be allocated an agreed upon amount of the fees.

15. The professionals that choose to enter into a contractual arrangement with NewCo as an independent contractor will be required to sign a written independent contractor agreement. This independent contractor agreement will provide, but not be limited to, the following conditions:

(a) The professional will provide services to NewCo on a fee per diem basis. The per diem fee will be negotiated with each professional. The per diem amount will vary, based upon the level and the type of service to be provided, for example XXXXXXXXXX. As well, it will be significantly influenced by the billing rates that the professional receives as determined by XXXXXXXXXX;

(b) NewCo and the contracting professional shall agree to consider their relationship to be that of hirer and independent contractor. The contracting professional shall provide the professional services as required by NewCo for its XXXXXXXXXX professional practice. It will be a set time (XXXXXXXXXX) contract for services and not an indefinite period contract of services (as will apply for employees);

(c) The contract will be for a fixed period of XXXXXXXXXX and can be renegotiated on an XXXXXXXXXX basis if both parties decide to continue with the working relationship;

(d) Either NewCo or the independent contractor may terminate the contract. The party terminating the contract must provide the other party written notification of his or her retirement XXXXXXXXXX prior to his or her date of leaving;

(e) The requirements of the independent contractor shall be mutually agreed upon between NewCo and the independent contractor. There will be a minimum number of workdays per year that the professional agrees to work. The professional can determine what days and hours they will work, without NewCo setting the hours that they will work. If the professional performs no services, they will not be paid. The professional will provide the following services with a per diem rate established for each service: XXXXXXXXXX; and other;

(f) The per diem rates established for each type of service provided will be determined by a number of factors including the billing rates used by XXXXXXXXXX, the fee guidelines provided by XXXXXXXXXX, the specialized knowledge and additional educational and practical requirements needed, the amount of time required by the independent contractor to provide the service and whether or not they are required to provide services beyond the regular 8:30 a.m. to 5:30 p.m. day;

(g) NewCo will pay the independent contractor his or her per diem rate on a monthly basis. The independent contractor must fulfill the requirements of his or her mutually agreed upon written independent contractor agreement. There will be no payment to the independent contractor if no services have been performed. However, the independent contractor will be given all the freedom required to achieve the desired result;

(h) All payments made by third parties, such as XXXXXXXXXX, for professional services provided by an independent contractor for the benefit of NewCo, will be paid directly to NewCo; and

(i) NewCo will provide for some supplies, instruments, and equipment required by the independent contractor in providing their professional services. The independent contractor is responsible for other expenditures, including but not limited to the following, incurred in the performance of his or her professional services:

(i) professional membership fees and dues;

(ii) professional insurance;

(iii) travel expenses, including motor vehicle, accommodations and meal expenses;

(iv) professional development courses or seminars; and

(v) any entertaining expenses related to his or her profession.

16. There will be no exclusivity of performing services for NewCo, i.e., each independent contractor may provide services to more than one party. The independent contractor will not be prohibited from competing with NewCo and it is expected that some independent contractors will compete with NewCo.

17. The professionals that choose to form a XXXXXXXXXX corporation to provide services to NewCo, will incorporate a XXXXXXXXXX corporation pursuant to all of the requirements for incorporation as required by XXXXXXXXXX (see Paragraph 18). These corporations will provide professional services upon the same basis as the independent contractors discussed above, and evidenced by a written signed contractual arrangement with NewCo and the contracting company.

18. XXXXXXXXXX.

19. For greater certainty, NewCo requires that each contracting company be a taxable Canadian corporation and a Canadian-controlled private corporation.

20. The professionals of a contracting company will be employees of the contracting company and will provide services for the benefit of the contracting company pursuant to the terms of the written agreement between NewCo and the contracting company. As well, a written employment contract will be required detailing the employment relationship between the contracting company and the professional.

21. Professionals of the Partnership who are not currently Senior Partners will not have the option on what contractual arrangement they will establish with NewCo. The contractual arrangement offered to each of these individuals will be done on an individual-by-individual basis and will depend on the requirements of NewCo. As well, the board of directors of NewCo will determine in the future what contractual arrangement options will be made available to new professionals.

22. There will not be any contractual relations between NewCo and the contracting companies, other than what has been detailed previously in this letter.

(i) Except for those who are presently shareholders of XXXXXXXXXX, any professional will not be an employee, officer, director or shareholder of more than one contracting company. Professionals who are presently shareholders of XXXXXXXXXX may be an employee, officer, director or shareholder of not more than two contracting companies. XXXXXXXXXX is a Senior Partner, the shareholders of which are mainly other Senior Partners and family trusts of Senior Partners. The shares of XXXXXXXXXX are equally owned by each of its XXXXXXXXXX shareholders (see Appendix A).

(ii) The spouse or child of a professional may only be a shareholder of one XXXXXXXXXX corporation that is a contracting company, specifically of the contracting company of the professional they are related to. Exceptions to this requirement are for any professional couple considered to be spouses under the Act and for common-law partners pursuant to subsection 248(1).

(iii) NewCo shall prepare a budget each year to calculate its approximate revenues and expenses for the year. NewCo will determine its payments to the contracting professionals and contracting companies, as set out in each contractual agreement. NewCo will endeavor to operate in such a manner that will result in annual net profits to NewCo. The directors of the company will have the sole discretion to:

a. have NewCo's net profits taxed in NewCo to a maximum of the "business limit" as defined in subsection 125(2) or other amount as may be revised from time to time;

b. distribute the excess to the directors of NewCo in the form of a bonus;

c. pay consulting fees to any retired professional that continues to provide services to NewCo; or

d. carry out a combination of points (a), (b) and (c), above.

PURPOSES OF THE PROPOSED TRANSACTIONS

The purposes of the proposed transactions are to restructure the XXXXXXXXXX professional practice of XXXXXXXXXX to provide the following advantages to the professionals:

(i) To provide more options and control to each professional for estate and succession planning. As well, it is generally easier and less costly to transfer shares in a company than it is to dispose of a partnership interest.

(ii) To facilitate the entry and exit of professionals to the practice.

(iii) To provide more flexibility and control to each professional:

a. in determining the hours and days that he or she will work;

b. in deciding on an individual basis the amount of effort and time that he or she wants to exert for the practice;

c. in incurring expenditures related to the profession;

d. to see a direct result between effort and time put into the practice and his or her earnings;

e. to take leaves for study and courses; and

f. to take vacations.

(iv) Each professional will be responsible for the financing, investing, directing and operating of his or her own practice either as an independent contractor or as an employee and President of a contracting company. This structure provides the opportunity for each professional to manage the overall profitability and well being of his or her own practice.

(v) The new structure provides increased flexibility in determining the level of income earned personally by those professionals that decide to provide their services through a contracting company. Any income that is not needed personally can be taxed and reinvested in the corporation.

(vi) To provide each professional, if he or she decides, with the opportunity to provide services to other parties. This gives the professional the ability to increase their earnings beyond what is available in their current practice.

(vii) The restructuring will improve each professional's position with respect to joint and several liability inherent in providing professional services through a partnership.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

A. Where, in a taxation year, a Senior Partner's Contracting Company is hired as an independent contractor to carry out XXXXXXXXXX services for NewCo, all as described in Paragraph 12(d) and Paragraph 17, that Contracting Company will not be considered to be carrying on a "personal services business", as defined in subsection 125(7), in relation to the services it provides to NewCo in that taxation year, provided the Senior Partner would not reasonably be regarded as an officer or employee of NewCo, but for the existence of the Contracting Company.

B. Provided that neither NewCo or XXXXXXXXXX were members of a partnership in a particular taxation year and any Contracting Company was not a member of a partnership in that same year, the income of Newco, XXXXXXXXXX and any Contracting Company for that taxation year will not be considered "specified partnership income" within the meaning of subsection 125(7).

C. Subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R4, issued by the CCRA on January 29, 2001, and are binding provided the proposed transactions are entered into on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly that the CCRA has agreed to or accepted:

(i) the reasonableness of any expenditures referred to in this letter, or the determination of fair market value, adjusted cost base or undepreciated capital cost of any property referred to in this letter;

(ii) the GST implications of any of the proposed transactions; and

(iii) the classification for income tax purposes of the amount of any excess paid in accordance with Paragraph 25(b).

OPINION

A direction in accordance with subsection 256(2.1) is based on the facts on a year-to-year basis, and therefore we are not able, pursuant to paragraph 15(j) of Information Circular-70-6R4, to rule that this provision will not be applied. However, we are prepared to offer the following general comments.

Where a business that was previously carried on in a partnership is subsequently carried on by the former partners and no longer in partnership for reasons other than tax reasons, this fact, in and of itself, would generally not cause subsection 256(2.1) to be applicable should the former partners incorporate their business activities. A particular determination of the reasons for such reorganization would be a question of fact. However, based on the facts disclosed in this Ruling, when the Senior Partners incorporate their business activities, it is our opinion that this fact will not, in and of itself, cause subsection 256(2.1) to be applicable.

In accordance with paragraph 22 of Information Circular 70-6R4, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CCRA.

Yours truly,

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

XXXXXXXXXX