17 May 2002 Internal T.I. 2002-0139547 - TRANSFER OF INCOME TO A 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 CCRA is pursuing other cases in court similar to Wallsten; whether the maintaining of our position is inconsistent with the decision of the Supreme Court in Wallsten

Position: We are not aware of any other cases presently before the Courts. Our position is not inconsistent with Campbell.

Reasons: Our response to Question 3 at the 2001 CTF Round Table merely reflects our opinion that, since we are maintaining our position despite Wallsten, there will probably be other cases proceeding to litigation. In Campbell, the court recognized that the doctor was operating a hospital providing a broad range of services, which was licensed under Ontario law, and not practicing medicine in contravention of provincial law. In Wallsten, the court accepted that Mr. Wallsten was operating outside the terms of his contract, and yet found for the taxpayer.

								May 17, 2002

	Audit Directorate					HEADQUARTERS
	Anne Wilson						Wayne Antle, CGA
	Manager						(613) 957-2102
	Technical Applications & Valuations Division
								2002-013954

Transfer of Professional Income to a Corporation

This is further to your email of May 8, 2002, concerning our decision not to revise our position on the transfer of professional income to a professional corporation, despite the decision of the Tax Court in the case of Jerome Wallsten and Lakeside Properties Ltd. v. The Queen (2001 DTC 215). Our response to the Wallsten case was announced at the 2001 Canadian Tax Foundation Round Table discussions, and is included in Technical News No. 22 ("TN 22").

In particular, one of the participants at an upcoming meeting with the XXXXXXXXXX has asked, in light of our response to Question 3 in TN 22, whether there are any other cases before the courts concerning this issue. The participant feels that our decision not to change our position following the Wallsten decision was in sharp contrast to the decision of the Supreme Court in The Queen v. Dr. H. Hoyle Campbell (80 DTC 6239).

Our Comments

We are not aware of any other cases presently before the courts dealing with this issue. Our response to Question 3 in TN 22 merely reflected our view that, since we were not changing our position as a result of the Wallsten decision, then it is likely that the issue will be brought before the courts again.

With respect to the Campbell case, we outlined our position in our response to Question 2. In this case, the Supreme Court considered whether fees for medical services paid to a doctor were properly reported as income by a private corporation. Dr. Campbell incorporated a company to operate a private hospital and beneficially owned all the shares of the company. The company employed him and paid him a fixed salary. In return, Dr. Campbell paid to the company all fees for medical services which he received from the provincial health insurance plan. The plan required that bills for a practitioner's services be paid directly to the practitioner. For the 1967, 1968 and 1969 taxation years, the taxpayer declared as income the amounts received as salary and bonuses from the company, and not the professional fees he received from the plan. The Minister reassessed on the basis that the fees received from the plan represented the taxpayer's income, and therefore added these fees to the taxpayer's income for the years in question. The Supreme Court found that, while the facts indicated that fees under the provincial health plan were required to be paid to the doctor, this was not the controlling factor. There was a valid arrangement between Dr. Campbell and the company regarding the salary to Dr. Campbell, and an accounting of fees to the company as employer. The court also found that the corporation was operating a hospital providing a broad range of services, which was permitted under provincial laws, rather than practicing medicine, which was not allowed under such laws.

When the decision in the Campbell case was rendered, we did not change our view (outlined in Interpretation Bulletin IT-189R2 Corporations Used by Practising Members of Professions) that professionals could not earn income through professional corporations where they were legally precluded from practising their professions through such corporations. It was felt that the facts in Campbell were not typical of most incorporated professionals in that Dr. Campbell's company was a private hospital incorporated under Ontario law to provide a broad range of hospital services.

As noted in our response to Question 1, our position is consistent with the 1964 decision of the Exchequer Court in Laverne Clifford Kindree v. MNR (64 DTC 5248). In this case, the Appellant, a medical doctor, constructed a medical clinic in which to practise his profession. He subsequently, incorporated a company, of which he was the controlling shareholder, to operate the clinic. He and his wife (a registered nurse) transferred all the business assets to this company, and signed employment contracts with the company. The doctor deposited the amounts received to the company's bank account, and paid all business expenses from the company account. Judge Cattanach ruled that the income was earned by the doctor and not the corporation because, under the relevant provincial statutes, only individuals could be registered to practise medicine. He also pointed out that there was no substantive change in the way the business was conducted after incorporation, and the patients were unaware that the corporation was providing the medical service until after the service was provided and the bill was rendered.

As further stated in our response to Question 1, we will not be following the decision in the Wallsten case as this was an Informal decision of the Tax Court. While we recognize that cases decided under the Informal Procedure have been referred to in other Tax Court cases, these decisions are not precedent setting pursuant to section 18.28 of the Tax Court of Canada Act.

In conclusion, it is our view that the facts in Wallsten are distinguishable from those in Campbell, and are more consistent with Kindree. Accordingly, we are maintaining our position set out in IT-189R2, which we clarified at the 2001 CTF Round Table discussions. If insurance agents, financial planners, or other professionals are legally, whether contractually or by statute, precluded from assigning their income to a corporation, then the income must be reported by the individuals, and cannot be reported through a corporation, regardless of the documentation provided. Where professionals are not otherwise precluded from assigning their income to a corporation, then the income must be reported by the person, whether the individual or the corporation, who is carrying on the business. Please refer to paragraph 1 of IT-189R2 for a discussion of the factors to be considered in determining who is carrying on the business.

We trust that our comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

John Oulton, CA
Section Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch