2001 Ruling 2001-0102663 - INCORPORATION OF PROFESSIONAL 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 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 incorporation of partnership as professional corporation is a personal services business

Position: no - if Principal carrying out services through a Contracting Company does not provide services to Amalco in his/her capacity as an employee or officer of Amalco

Reasons: same as 2000-0034813 and E 9915403, with some additional reorgs

XXXXXXXXXX 				2001-010266

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

RE: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling, as well as your subsequent correspondence.

To the best of your knowledge and that of the taxpayers involved in this ruling request, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;

(iii) under objection by one or any of the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

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

In this letter, the following terms have the meanings specified:

(a) "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 relevant provision of the Act;

(b) "Amalco" means the corporation to be formed on the amalgamation of Newco #1 and Newco Holdings pursuant to the laws of the Province;

(c) "Assets of the Practice" means the assets of and related to the Practice that are "Eligible Property", and that are accounts receivable and prepaid expenses that will be transferred to Newco #1 as described in paragraph 18 below;

(d) "Canadian-controlled private corporation" ("CCPC') has the meaning assigned by subsection 125(7) of the Act;

(e) "CCRA" means the Canada Customs and Revenue Agency;

(f) "College" means the College of Physicians and Surgeons of the Province;

(g) "Contracting Corporations" mean the corporations, yet to be incorporated for the benefit of individual Principals, which will carry on the independent practice of medicine, and which will enter into contractual relations with Amalco for the provision of professional services. Contracting Corporations are listed in appendix B;

(h) "Contracting Professionals" mean the Professionals who choose to enter into contractual relations with Amalco for the provision of professional services in the Practice as independent contractors, as described under the heading "Proposed Transactions;

(i) "Eligible Property" has the meaning assigned by subsection 85(1.1) of the Act;

(j) "Limited Partnership #1" means "XXXXXXXXXX";

(k) "Limited Partnership #2" means "XXXXXXXXXX";

(l) "Newco #1" means XXXXXXXXXX a new company to be incorporated pursuant to the laws of the Province as described in paragraph 13 below;

(m) "Newco Holdings" means XXXXXXXXXX a new company to be incorporated pursuant to the laws of the Province as described in paragraph 14 below;

(n) "NumberCo" means XXXXXXXXXX, and is described in paragraph 7 below;

(o) "Partnership" means the existing partnership of XXXXXXXXXX physicians currently carrying on the Practice under the firm name and style of "XXXXXXXXXX", a partnership governed under the laws of the Province;

(p) "Practice" means the professional practice of medicine at various locations within the Province currently carried on by the Partnership;

(q) "Principal" means each of the XXXXXXXXXX individuals who is a partner of the Partnership as of the date hereof, and as listed in Appendix A;

(r) "Professional" means each individual physician who currently provides professional services to the Partnership as required in the Practice, whether in his or her capacity as a partner of the Partnership (being the Principals), an employee of the Partnership, or an independent contractor;

(s) "Professional Employee" means a Professional who chooses to enter into an employment relationship with Amalco for the provision of employment services;

(t) "Property Amalco" means the corporation formed on the amalgamation of Realty Co. and Property Holdco pursuant to the laws of the Province;

(u) "Property Holdco" means a new corporation to be incorporated pursuant to the laws of the Province;

(v) "Province" means the Province of XXXXXXXXXX;

(w) "Realty Co" means "XXXXXXXXXX", a corporation incorporated pursuant to the laws of the Province; and

(x) "Taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1) of the Act.

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

FACTS

1. The Partnership is a partnership currently consisting of XXXXXXXXXX individual physicians (Principals) and Limited Partnership #1. The Partnership was formed in XXXXXXXXXX.

2. There are currently XXXXXXXXXX associate physicians who provide services to the Partnership, but are not partners. The Partnership employs approximately XXXXXXXXXX office assistants, stenographers, nurses and accounting staff. The Principals of the Partnership practice in various disciplined specialties such as XXXXXXXXXX. The taxpayers applying for this Ruling are all of the Principals.

3. The Partnership owns all of the issued shares of Realty Co. Realty Co. owns all of the land and buildings and the laboratory equipment, together with the adjacent parkade and parking lots. In addition to charging the Partnership a rental fee for the use of the facilities, Realty Co. leases space to arm's-length tenants, receives parking revenue and operates the lab and x-ray facilities and cardiac laboratory.

4. Limited Partnership #1, formed by an agreement in writing made as of XXXXXXXXXX, is a partner in the Partnership providing management and administrative functions to the Partnership.

5. Limited Partnership #2, formed by an agreement in writing made XXXXXXXXXX, provides business manager services to Realty Co. It manages, operates and maintains the lands, buildings, parking lot, laboratory and X-ray facilities and cardiac laboratory owned by Realty Co.

6. The partners of both Limited Partnership #1and Limited Partnership #2 consist of some of the Principals and inter vivos trusts.

7. NumberCo is a wholly owned subsidiary of Realty Co. and holds an interest in a partnership that owned the XXXXXXXXXX.

8. The Partnership is currently governed by a written Partnership Agreement that was most recently amended XXXXXXXXXX. The major terms of the Partnership Agreement are as follows:

Principals share in the net income of the Partnership in such manner as may from time to time be determined by the partners. Presently the partners are allocated their fee production, less a share of overhead. The overhead allocation is based on a formulaic calculation with a minimum overhead allocation of $XXXXXXXXXX and a cap of $XXXXXXXXXX.

Associates are entitled to their fee production, less a share of overhead. The overhead rate is XXXXXXXXXX percent higher than for the Principals and the minimum and cap are the same.

The Partnership is governed by an Executive Committee, consisting of an elected Chairman and XXXXXXXXXX members, all of whom are Principals. The Executive Committee has the power to make special income allocations, up to XXXXXXXXXX of the Partnership fee pool, for special cases such as illness, financial hardship, etc.

9. The Partnership has three (3) types of capital accounts: Capital A, Capital B, and Capital C.

The Capital A accounts represent the adjusted cost base value of the partners' interest in Realty Co. as at XXXXXXXXXX, the date which the shareholders of Realty Co. sold the shares of Realty Co. to the Partnership.

The Capital B accounts represent the difference between the fair market value and the adjusted cost base of the former shareholders' shares in Realty Co. sold to the Partnership in XXXXXXXXXX.

The Capital C accounts represent the current equity contributions of the Principals to the Partnership. Each new Principal is required to contribute $XXXXXXXXXX cash into his or her Capital C account on joining the Partnership with additional contributions, to increase that account by XXXXXXXXXX% of the Principal's net earnings for each year, until a total of $XXXXXXXXXX is reached. The Executive Committee of the Partnership is responsible for renewing the Capital C account structure from time to time to determine if the amounts and the rate at which they are accumulated are adequate for the Partnership's needs.

As at XXXXXXXXXX, the Capital A and B accounts were frozen at the levels as at that year-end. It was determined that those capital accounts would be paid out over a period of time, according to a certain schedule. As at XXXXXXXXXX, all amounts owing to Principals in respect of their Capital A and B accounts will have been paid out, leaving only the Capital C accounts.

Upon the retirement or resignation from the partnership a Principal is entitled to receive a refund of the amount he/she has contributed to his/her Capital C account, subject to forfeiting an amount from his/her current fiscal year's income calculated as follows:

XXXXXXXXXX.

Any amount of income forfeited by a Principal is allocated to continuing Principals on the basis of the value of an individual Principal's total Capital C account, compared to the total value of all Principals' Capital C accounts.

10. Dividends received from Realty Co. on the shares of Realty Co. held by the Partnership are allocated to the Principals on a proportionate basis based on the balance in their Capital C account at the end of the preceding year.

11. Principals are required to retire as a Principal on XXXXXXXXXX.

12. All of the Principals are residents of Canada. None of the Principals is "related" to another Principal within the meaning of paragraph 251(2)(a) of the Act.

PROPOSED TRANSACTIONS

13. Newco #1 will be incorporated under the laws of the Province, and will be authorized to issue an unlimited number of common shares, Class A preferred shares, Class B preferred shares and Class C preferred shares, without nominal or par value. Newco #1 will be a CCPC and a TCC.

14. Newco Holdings will be incorporated under the laws of the Province, and will be authorized to issue an unlimited number of common shares, Class A preferred shares, Class B preferred shares and Class C preferred shares, without nominal or par value. Newco Holdings will be a CCPC and a TCC.

15. Property Holdco will be incorporated under the laws of the Province, and will be authorized to issue an unlimited number of common shares, Class A preferred shares, Class B preferred shares and Class C preferred shares, without nominal or par value. Property Holdco will be a CCPC and a TCC.

16. Newco #1 will make an application to the College for a permit to practice medicine in the Province. XXXXXXXXXX of the Medical Act of the Province permits a corporation to engage in the practice of medicine upon having obtained a permit from the College.

17. At the opening of business on XXXXXXXXXX, Limited Partnership #1 will withdraw as a partner of the Partnership and its capital in the Partnership will be returned to it. Thereafter the operations of Limited Partnership #1 will cease. Employees of Limited Partnership #1 will have their existing employment terminated and thereafter will be hired by Limited Partnership #2 effective XXXXXXXXXX. Early in XXXXXXXXXX, the remaining liabilities will be discharged, and any available assets will be distributed to the remaining partners of Limited Partnership #1. Limited Partnership #1 will be formally wound-up shortly thereafter.

18. Upon Newco #1 obtaining a permit from the College, on or about XXXXXXXXXX, the Partnership will transfer all of the Assets of the Practice to Newco #1 in return for common shares of Newco #1. With respect to each Asset of the Practice that is an "eligible property", the Partnership will elect pursuant to subsection 85(2) of the Act in respect of those transfers in prescribed form and within the time determined under subsection 85(6) of the Act. The agreed amounts for each asset (or group or class of assets) in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) of the Act 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 amounts permitted by paragraph 85(1)(b) of the Act.

19. On XXXXXXXXXX, the remaining partners will assume their proportionate share of the liabilities of the Partnership and thereafter Partnership will distribute all the assets of the Partnership to the remaining partners of the Partnership (consisting of the Principals) pursuant to subsection 98(3) of the Act. Each of the Principals will hold an undivided interest in each of the Partnership assets distributed. The Partnership and each of the Principals will elect pursuant to subsection 98(3) of the Act in respect of those distributions in prescribed form and within the time determined under subsection 96(4) of the Act that that each Principal's proceeds of disposition of his or her interest in the Partnership, the cost to each Principal of its undivided interest in each asset of the Partnership and the Partnership's proceeds of disposition of each such asset shall be determined in accordance with the rules in subsection 98(3) of the Act.

20. In order to consolidate the undivided interest that each Principal has in the shares of Newco #1, each of the Principals of the Partnership will transfer such undivided interests to Newco Holdings for 1 common share each of Newco Holdings, Class A preference shares of Newco Holdings, and a demand non-interest bearing promissory note from Newco Holdings. Each of the Principals will elect pursuant to subsection 85(1) of the Act in respect of those transfers in prescribed form and within the time determined under subsection 85(6) of the Act. The agreed amounts in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) of the Act and will not exceed the respective fair market value of their undivided interests in the shares of Newco Holdings, nor will they be less than the amounts permitted by paragraph 85(1)(b) of the Act.

21. In order to consolidate the undivided interest that each Principal has in the shares of Realty Co. each of the Principals of the Partnership will transfer such undivided interests in Realty Co to Property Holdco for 1 common share each of Property Holdco, Class A preference shares of Property Holdco, the assumption of debt, and a demand non-interest bearing promissory note from Property Holdco. Each of the Principals will elect pursuant to subsection 85(1) of the Act in respect of those transfers in prescribed form and within the time determined under subsection 85(6) of the Act. The agreed amounts in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) of the Act and will not exceed the respective fair market value of their undivided interests in the shares of Realty Co., nor will they be less than the amounts permitted by paragraph 85(1)(b) of the Act.

22. Newco #1 and Newco Holdings will amalgamate by short-form vertical amalgamation to form Amalco, pursuant to subsection 87(1) of the Act. All the assets and the liabilities of Newco #1 and Newco Holdings will become assets and liabilities of Amalco. The shares of Newco#1 held by Newco Holdings will be cancelled without any repayment of capital in respect of those shares. The shares of Newco Holdings will not be cancelled on the amalgamation and no shares of the capital stock of Amalco will be issued by Amalco in connection with the amalgamation.

23. The Partnership will be dissolved.

24. The shareholders of Amalco will elect directors from among themselves. It is expected that the number of directors of Amalco will equal the current number of Executive Committee members of the Partnership. The directors shall elect the officers, and it is expected that the Chair of the Board of Amalco will be the individual who is currently the Chairman of the Partnership.

Shareholders Agreement

25. Amalco and each of its shareholders (being all the Principals) shall enter into a Shareholders' Agreement which shall provide, among other things that:

(a) The business of Amalco shall be the Practice;

(b) Amalco will conduct the Practice by contracting with independent contractors to provide the required services, and may also employ physicians and others;

(c) Each shareholder of Amalco can be elected a member of the Board of Directors of Amalco, should he or she so desire;

(d) The net profits of Amalco available for distribution (in the discretion of the Board of Directors of Amalco) shall be distributed annually by way of dividends on the outstanding shares of Amalco from time to time;

(e) No shareholder shall be entitled to transfer his or her shares in Amalco without the prior written approval of Board of Directors of Amalco;

(f) The shares owned by a shareholder in the capital stock of Amalco will be purchased for cancellation if any of certain designated events occur including:

i. The bankruptcy of a shareholder;

ii. The shares of a shareholder are seized by a secured creditor or by court order;

iii. The license of a shareholder to practice medicine is cancelled or suspended;

iv. The death of the shareholder;

v. The shareholder fails to subscribe for additional shares in the capital stock of Amalco as required by the Board of Directors of Amalco; and

vi. The Board of Directors of Amalco vote to have the shares of the shareholder purchased for cancellation.

(g) The shares of Amalco shall be purchased at fair market value in a manner and price, as described in the Shareholders' Agreement.

Operation of Practice by Amalco

26. Upon the transfer of Assets of the Practice to Newco #1 followed by the amalgamation of Newco #1 and Newco Holdings to form Amalco, and following the wind-up of the Partnership, Amalco will carry on the Practice by providing professional services through:

(a) individuals licensed to practice medicine in the Province employed by Amalco to provide such services;

(b) individuals licensed to practice medicine in the Province engaged by Amalco as independent contractors to perform such services on behalf of Amalco (Contracting Professionals); and/or

(c) corporations engaged by Amalco as independent contractors to provide the services of individuals licensed to practice medicine in the Province to provide such services on behalf of Amalco (Contracting Corporations).

27. XXXXXXXXXX of The Medical Act of the Province provides that Amalco may carry on the practice of medicine through physicians holding a permit to practice medicine pursuant to The Medical Act of the Province. Each Principal will have the option of providing professional services to Amalco in respect of the Practice by entering into an employment arrangement with Amalco, entering into a contract for services with Amalco (as an independent contractor), or forming a new corporation which will enter into a contract for services with Amalco (as an independent contractor). Other Professionals may practice with Amalco upon such terms as the respective Professional and Amalco may agree.

28. Amalco will hold professional liability insurance coverage related to the medical activities carried on in Amalco.

29. Some of the Professionals (including some Principals) may elect to enter into an employment relationship with Amalco (as contemplated in paragraph 26(a) above) pursuant to a written employment agreement. The employment agreement will provide, among other things that:

(a) The employee shall perform such duties as Amalco may direct from time to time in respect of the Practice;

(b) The term of employment shall be from year to year, and may be terminated by either party by XXXXXXXXXX notice;

(c) The amount of annual salary will be negotiated from year to year in respect of each employee and will be paid monthly, subject to the usual source deductions; and

(d) Amalco shall supply all supplies, instruments and equipment as required in the performance of the employee's duties.

30. Professionals may, as contemplated in paragraph 26(b) above, enter into a contractual relationship with Amalco, whereby the Professional, as an independent contractor, agrees to provide certain professional services to Amalco that are required in the Practice on a "rate grid" basis, whereby the contracting professional will be paid a percentage of their fee production, based on a graduated rate schedule. This arrangement will be evidenced by a written contract, which provides, among other things that:

(a) The Contracting Professional and Amalco agree to practice medical services in association, whereby the Contracting Professional shall provide certain professional services required by Amalco in the Practice;

(b) The contract shall be for a fixed period, but may be terminated by either party upon XXXXXXXXXX notice;

(c) The obligation of the Contracting Professional shall be set out in a negotiated practice profile;

(d) The Contracting Professional shall be compensated based on the "rate grid", the amounts to be paid by Amalco to the Contracting Professional, provided the Contracting Professional's level of services is substantially complete (as defined by the agreement) in keeping with the set practice profile;

(e) All payments from third parties in respect of services provided by a Contracting Professional for the benefit of Amalco in the Practice shall be made directly to Amalco;

(f) Amalco shall supply certain supplies, instruments, facilities, and equipment required in the provision of professional services by the Contracting Professional, but the Contracting Professional shall be responsible for all expenses incurred by him or her in respect of the following:

i Professional membership fees and learned societies;

ii. Continuing professional education;

iii. Professional development transportation;

iv. Books and journals;

v. Maintaining the professional standards set by the College from time to time;

vi. Expenditures on personal practice preferences of the Contracting Professional; and

vii. The cost of liability insurance to cover the Contracting Professional.

(g) The contract may be terminated by the Contracting Professional or Amalco, in the manner set out in the written contract.

31. The particulars of the Contracting Professional's practice profile and the "rate grid" compensation for services will be negotiated on an individual basis each term of the contract.

32. The Contracting Professional will not be restricted from providing professional services to other persons or otherwise prohibited from competing with Amalco. However, Amalco will have a right of first refusal on any new sources of services.

33. Some Professionals will incorporate corporations to provide professional services to Amalco (as contemplated by paragraph 26(c) above) upon the same basis as with Contracting Professionals, mutatis mutandis, which arrangement between Amalco and each Contracting Corporation will be evidenced in writing.

Contracting Corporations

34. Each Contracting Corporation will be controlled by the respective Professional, who will be the legal and beneficial owner of all of the issued voting shares, and the sole director of that Contracting Corporation. The voting common shares of each Contracting Corporation may be beneficially owned by the respective Professional and, in some cases, non-voting common shares will be owned by family members of the Professional. All persons legally or beneficially owning shares of a Contracting Corporation will be residents of Canada.

35. A legal or beneficial shareholder of a Contracting Corporation will not be a legal or beneficial shareholder of another Contracting Corporation.

36. Each Contracting Corporation shall obtain a permit from the College to practice medicine in the Province prior to entering into a contract with Amalco to provide professional services.

37. The respective Professional will be an employee of the Contracting Corporation and will provide professional services for the benefit of the Contracting Corporation pursuant to the terms of its contract with Amalco. The relationship will be evidenced by an Employment Agreement in writing.

38. Each Contracting Professional and/or Contracting Corporation will be responsible for, and bear the risk of, loss of income for short and long term disability (i.e. disability beyond XXXXXXXXXX) and will make their own arrangements in regard to the short-term disability and may elect to enter into the Group Purchase of long-term disability and life insurance, which will be charged to each contracting Professional or Contracting Corporation.

Summary of Principal's Options

39. The transition from a Principal in the Partnership to either a Contracting Professional or Contracting Corporation will entail a significant increase in business risk to the Professional. The following matrix compares the exposure to risks for a Principal in the existing arrangement with the risks of a Contracting Professional, Contracting Corporation and Professional Employee under the new arrangement:

Attribute
Current Structure
Contracting Professional
Contracting Corporation
Professional Employee

Expected annual time contribution for an individual physician:

* As a Principal, he/she is required to devote their entire professional time to the business of the Partnership.

Negotiated annually between Contracting Professional and Newco.

Negotiated Annually between Contracting Corporation and Newco.

Fixed - based on negotiated employment contract.

Compensation

* As a Principal, allocated on a fee for service basis, net of an allocated overhead, agreed to by the Principals.

Compensation based on a pre-negotiated rate grid basis whereby a Contracting Professional will be paid a percentage of their fee production, based on a graduated rate schedule.

Compensation based on a pre-negotiated rate grid basis whereby a Contracting Corporation will be paid a percentage of their fee production, based on a graduated rate schedule.

Compensation based on negotiated annual salary.

Discretionary Income

Executive Committee has power to make special income allocations, up to XXXXXXXXXX of the Partnership Fee Pool, on a discretionary basis.

None: -No longer applicable.

None: -No longer applicable.

None: - No longer applicable.

Attribute
Current Structure
Contracting Professional
Contracting Corporation
Professional Employee

Professional Expenses:

All expenses paid by the Partnership, except College of Physician dues, society dues, professional development, travel and other professional development costs, books and journals and automobile.

Certain expenses paid by Newco, except College of Physician dues, society dues, travel and professional development, books and journals, automobile, life, disability and liability insurance for the Contracting Professional.

Expenses related to individual practices are the Contracting Professional's responsibility (i.e. computers, office furniture, etc.).

Certain expenses paid by Newco, except College of Physician dues, society dues, travel and professional development, books and journals, automobile, life, disability and liability insurance for the Contracting Professional.

Expenses related to individual practices are the Contracting Corporation's responsibility (i.e. computers, office furniture, etc.).

Expenses are the responsibility of Newco.

Risk of loss of income due to short term disability:

Partial risk borne by Partnership as Executive Committee power to allocate XXXXXXXXXX of Partnership Fee Pool.

Borne by Contracting Professional.

Borne by Contracting Corporation.

None

Risk of loss of income due to long term disability:

Partial risk borne by Partnership short term. Risk borne by Professional for remainder of disability.

Risk borne by Contracting Professional.

Risk borne by Contracting Corporation.

Risk borne by Professional Employee.

Disability and Life Insurance:

Group Policy charged to individual's draw account.

Borne by Contracting Professional (group buying).

Borne by Contracting Professional (group buying).

Borne by employee.

Risk of income loss due to maternity leave:

Borne by Principal.

Borne by Contracting Professional.

Borne by Contracting Corporation.

Borne by Professional Employee.

Control over hours worked, work schedule, duties performed, etc.:

Partnership Agreement requires entire professional time devoted to Partnership practice; day-to-day management controlled by individual partners.

Duties performed negotiated annually between Newco and Contracting Professional. Work schedule controlled by Contracting Professional.

Duties performed negotiated annually between Newco and Contracting Corporation. Work schedule controlled by Contracting Corporation.

Determined by Newco.

Restriction on "outside" practice:

All medical related income belongs to the Partnership.

Newco granted Right of First Refusal on new third party contracts.

Newco granted Right of First Refusal on new third party contracts.

None

40. The change from partner to Contracting Professional or Contracting Corporation will entail a increase in certain types of business risk. As a transitional provision, Principals will be offered the option to elect either self-employment (either directly as a Contracting Professional or through a corporation as a Contracting Corporation), or an employment arrangement as a Professional Employee of Amalco. This will allow each Principal the ability to independently manage risks relating to the transition.

41. Professionals who are not Principals will not have the same transitional provision; the decision about what contractual arrangements are offered will depend on the needs of Amalco as determined by its Board of Directors. Similarly, physicians wishing to provide services in the future may be offered a limited range of options depending on the needs of Amalco at the time.

General

42. There will not be any contractual relations between or among any of Amalco and the Contracting Corporations other than the arrangements described above.

43. No Professional will be an employee, officer, director or shareholder (whether legally or beneficially) of more than one (1) Contracting Corporation.

44. Related persons of a Professional (within the meaning of subsection 251(2) of the Act), shall be shareholders, if at all, of only the Contracting Corporation controlled by the particular Professional.

45. Each Professional currently deals at arm's length with each other Professional, except in XXXXXXXXXX cases where Principals' spouses are XXXXXXXXXX (and not Principals) of the Partnership.

46. Amalco shall estimate its annual revenues and endeavor to contract with the Contracting Professionals and the Contracting Corporations in such a manner that will result in an annual profit to Amalco. To the extent Amalco's taxable income for any particular taxation year exceeds XXXXXXXXXX the excess will likely be distributed (in the absolute discretion of the directors) as bonuses by Amalco.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to restructure the professional practices of the Principals, without adverse tax consequences, so that they meet their professional obligations in respect of the Practice while:

• Eliminating joint and several liability inherent in providing professional services through a partnership;
• Providing each Principal with the opportunity to participate in the practice as a Contracting Professional or through a Contracting Corporation and, as such, having increased control over his or her individual level of participation in the Practice;
• Providing each Principal with a better congruence between efforts put into the Practice and the financial return received from his or her respective professional practice;
• Providing a vehicle through which an individual Principal may, if he or she so desires, provide professional services external to the Practice should Amalco not exercise the right of first refusal on new services;
• Providing increased business efficiency for each Principal through individual management of personal practice preferences and expenses;
• Permitting each Principal to have control over expenditures reflecting personal practice preferences, where such expenditures may not be in the interest of all participants in the Practice;
• Providing more flexibility for estate planning on the part of each individual Principal;
• Facilitating ease of entry to the Practice by other professionals and exit from the Practice by the Principals; and
• Providing more flexibility for income tax planning at the individual corporate level; dividend distributions, and availability of the small business deduction.

The purpose of the proposed transactions is also to separate ownership in the real property holdings held by Realty Co. from the medical operations of the Practice in different legal entities in order to protect the real property holdings from any legal actions or liabilities arising from the Practice.

RULINGS

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 completed in the manner described above, our rulings are as set forth below:

A. Subsection 85(2) of the Act will apply to the transfer of the Assets by the Partnership to Newco #1 (described in paragraph 18 of the Proposed Transactions) that are Eligible Properties such that the Partnership's proceeds of disposition and Newco's cost of each Asset (or group or class of Assets) will be deemed by paragraph 85(1)(a) (read with such modifications as the circumstances require) to be the agreed amount in respect thereof.

B. The provisions of subsection 98(3) of the Act will apply to the dissolution as described in paragraph 19 of the Proposed Transactions to, inter alia, determine the amount of each Principal's proceeds of disposition of his or her interest in the Partnership, the cost to each Principal of his or her undivided interest in each asset of the Partnership and the Partnership's proceeds of disposition of those assets.

C. Subsection 85(1) of the Act will apply to the transfer of each Principal's undivided interest in the shares of Newco #1 to Newco Holdings (described in paragraph 20 of the Proposed Transactions) such that each Principal's proceeds of disposition and Newco Holding's cost of the shares of Newco #1 transferred to Newco Holdings will be deemed by paragraph 85(1)(a) of the Act to be the agreed amount in respect thereof.

D. Subsection 85(1) of the Act will apply to the transfer of each Principal's undivided interest in the shares of Realty Co. to Property Holdco (described in paragraph 21 of the Proposed Transactions) such that each Principal's proceeds of disposition and Property Holdco's cost of the shares of Realty Co. will be deemed by paragraph 85(1)(a) of the Act to be the agreed amount in respect thereof.

E. On the amalgamation of Newco Holdings and Newco #1 described in paragraph 22 above, the provisions of:

(a) subsection 87(1) will apply, by virtue of subsection 87(1.1);

(b) subsection 87(4) will apply, such that:

(i) each of the former shareholders will be deemed by paragraph 87(4)(a) to have disposed of its shares of Newco Holdings for proceeds of disposition equal to the total of his or her adjusted cost bases of such shares immediately before the amalgamation; and

(ii) each such former shareholder will be deemed by paragraph 87(4)(b) to have acquired its common shares of Amalco for an amount equal to the aggregate proceeds of disposition referred to in paragraph (i) above;

F. Amalco will be entitled to claim a deduction in computing its income from its business under subsection 9(1) of the Act within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act in respect of the amounts payable by it for the professional services rendered to it by Professional Employees, the Contracting Professionals or the Contracting Companies.

G. Provided that a Principal carrying out the services described in paragraph 3 above through a Contracting Company does not provide services to Amalco in his/her capacity as an employee or officer of Amalco, we confirm that a Contracting Company will not be considered to be carrying on a "personal services business" as defined in subsection 125(7) of the Act in a situation where five or less full time employees are engaged by the particular Contracting Company.

H. Provided that a partnership does not exist between Amalco or any Contracting Company pursuant to section 3 of the Partnership Act of the Province, the income and any Contracting Company will not be considered "specified partnership income" within the meaning of subsection 125(7) of the Act.

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

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 (the "Circular") issued by the CCRA on January 29, 2001, and are binding provided the proposed transactions are completed 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 to the Act.

OPINION

A direction in accordance with subsection 256(2.1) of the Act is based on the facts on a year-to-year basis, and therefore we are not able, pursuant to paragraph 15(j) of the Circular, 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) of the Act 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 partners of the Partnership incorporate their business activities, it is our opinion that this fact will not, in and of itself, cause subsection 256(2.1) of the Act to be applicable.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of the Circular and are not binding on the CCRA.

Nothing in this letter should be construed as implying that CCRA has agreed to or accepted:

(i) the determination of cost, FMV, ACB or UCC of any property referred to in this letter;

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

(iii) the classification for income tax purposes of the amount of any excess paid in accordance with paragraph 46 above; and

(iv) any other tax consequences arising from the facts or proposed transactions described herein, other than those specifically confirmed in the rulings given.

Yours truly,

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

							Annex A

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						Appendix B

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