2007 Ruling 2006-0198101R3 - Partnership Reorganization Professional 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.

Principal Issues: Where a partner of a professional partnership creates a professional corporation through which professional services will be provided to the partnership, will the corporation be eligible for the small business deduction?

Position: Yes.

Reasons: As long as the partner in his or her role of an employee of the professional corporation providing the services of the "professional function" would not, but for the corporation, be considered an employee of the partnership, then the business of the corporation is not a personal services business. Also, provided that the professional corporations are not themselves carrying on business in partnership, there is no specified partnership income.

XXXXXXXXXX 							2006-019810

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Partnership")
XXXXXXXXXX (the "Named Partner")

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above noted individual and partnership. We also acknowledge your additional letters (delivered via email) of XXXXXXXXXX, and our telephone conversations with you (XXXXXXXXXX).

We understand that, to the best of your knowledge, and that of the taxpayers involved, none of the issues described herein is:

(i) in an earlier return of the above-named individual, partnership or a related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed return of the above-named individual, partnership or a related person;

(iii) the subject of any notice of objection;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal has not expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency.

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

DEFINITIONS

(a) "Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th supp.) c.1, as amended to the date hereof. 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) "Administrative Responsibilities" means all of the administrative responsibilities that are, and will continue to be, carried out by the Partners to carry on the Practice, which include, among other things: (i) promoting, and contributing to the growth of, the Practice, (ii) conducting management functions, (iii) educating Professionals and staff, (iv) enhancing the Partnership's profile, (v) recruitment and (vi) referrals;

(c) XXXXXXXXXX;

(d) "associated" when used in connection with a Professional Corporation or Contracting Company has the meaning described in subsection 256(1) of the Act;

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

(f) "City" means the City of XXXXXXXXXX;

(g) "College" means the XXXXXXXXXX of the Province;

(h) "Contracting Company" means each Professional Corporation that will be incorporated as permitted under the laws of the Province (and as described in Paragraph 9) for the benefit of an existing Principal and that will be engaged by the Partnership to provide Professional Services (as more particularly described in Paragraphs 8 and 10) and, collectively, they are referred to as "Contracting Companies";

(i) "Corporations Act" means XXXXXXXXXX;

(j) "CRA" means the Canada Revenue Agency;

(k) XXXXXXXXXX;

(l) "Electing Partners" means those Partners who elect to provide Professional Services to the Partnership through a Contracting Company, as more particularly described in Paragraphs 8 and 10;

(m) "Fiscal Year" means the fiscal year of the Partnership, being XXXXXXXXXX;

(n) XXXXXXXXXX;

(o) "XXXXXXXXXX Fee" means the fee described in Paragraph 26;

(p) "XXXXXXXXXX Services" means those services described in Paragraph 25;

(q) "Issued Units" means the number of units of the Partnership that are currently outstanding;

(r) "XXXXXXXXXX Act" means XXXXXXXXXX;

(s) "Non Electing Partners" means those Partners who do not elect to provide Professional Services to the Partnership through a Contracting Company but rather continue to provide such Professional Services as a Partner of the Partnership;

(t) "Partners" means the Professionals and Professional Corporations who are currently partners of the Partnership;

(u) "Partnership" means the partnership which currently carries on the Practice under the firm name and style of "XXXXXXXXXX", a registered partnership pursuant to the laws of the Province;

(v) "Partnership Agreement" means the partnership agreement entered into among the Partners, as more particularly described in Paragraph 5;

(w) "personal services business" has the meaning assigned by subsection 125(7) of the Act;

(x) "Practice" means the services currently provided by the Partnership being: (i) the provision of Professional Services at various locations (including the XXXXXXXXXX) within the Province; and (ii) the provision of teaching resources as may be requested from time to time; and also includes the Administrative Responsibilities conducted by the Partners that are necessary to carry on the professional practice;

(y) "Principals" means (i) those individuals who are Partners as of the date hereof; and (ii) those individuals who are controlling shareholders of Professional Corporations that are Partners as of the date hereof, and "Principal" means any one of them;

(z) "Professional" means an individual XXXXXXXXXX;

(aa) "Professional Corporation" means a corporation that is incorporated under the laws of the Province XXXXXXXXXX;

(bb) "Professional Services" means the professional services of XXXXXXXXXX;

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

(dd) XXXXXXXXXX;

(ee) XXXXXXXXXX;

(ff) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(gg) "specified partnership income" has the meaning assigned by subsection 125(7) of the Act;

(hh) "Services Agreement" means the Services Agreement to be entered into between the Partnership and each Contracting Company, as more particularly described in Paragraph 13;

(ii) "taxable Canadian corporation" or "TCC" has the meaning assigned by subsection 89(1) of the Act;

(jj) "XXXXXXXXXX Partnership" means a limited partnership that is to be established and registered pursuant to the laws of the Province, which will provide certain XXXXXXXXXX services to the Partnership on a "fee for service" basis, all as described in Paragraphs 24 to 26;

FACTS

1. The Partnership was originally formed in XXXXXXXXXX through the union of XXXXXXXXXX practices located in the City. The Partnership carries on the Practice as a general partnership and has XXXXXXXXXX Partners. Of the current Partners, XXXXXXXXXX are individuals who are Professionals and XXXXXXXXXX are Professional Corporations whose sole shareholder is an individual who is a Professional. The remaining Partner is XXXXXXXXXX, which is described in greater detail in Paragraph 7, below.

2. The Practice is carried on by the Partners at the XXXXXXXXXX and at other facilities in the City. In addition to the Partners, there are a number of self employed Professionals ("Associates") who are not Partners but who provide services to the Partnership and are engaged in XXXXXXXXXX. The arrangement with Associates is governed by an associate agreement and Associates are paid fees for the services provided. There are also a number of technologists, support staff and management staff employed by the Partnership to undertake some of the various technical, administrative and management tasks required in the operation of the Practice. XXXXXXXXXX.

3. Currently, the Partners provide all of their services through the Partnership.

4. The Partnership's identification number is XXXXXXXXXX. The Partnership and the Named Partner file information and tax returns, as appropriate, with the XXXXXXXXXX Taxation Centre, and deal with the XXXXXXXXXX Tax Services Office. The main office of the Partnership is located at XXXXXXXXXX.

5. The Partnership is governed by a written Partnership Agreement that was originally signed on XXXXXXXXXX and has since been amended or restated on numerous occasions including most recently on XXXXXXXXXX. The key terms of the Partnership Agreement are as follows:

(i) the interests of the Partners in the Partnership are represented by units in the Partnership;

(ii) each Partner is entitled to hold a maximum of XXXXXXXXXX units;

(iii) XXXXXXXXXX;

(iv) each Partner also maintains a capital account with the Partnership to which is credited the amount of all capital contributions and the amount of all income allocated to the Partner and to which is debited the amount of any loss allocated to the Partner and any withdrawals made by the Partner;

(v) the net profits of the Partnership are generally distributed to the Partners based on the number of units they hold, the amount of time they have worked and the type of work they have performed;

(vi) each Partner is entitled to one vote on matters that come before meetings of the Partners, regardless of the number of units held by that Partner;

(vii) most matters require approval by a simple majority of Partners. Certain matters require approval by either a XXXXXXXXXX majority (e.g., opening a new office), an XXXXXXXXXX% majority (e.g., the admission of a new Partner), or by a unanimous vote of Partners (e.g., the expulsion of a Partner in certain cases);

(viii) day-to-day management of the affairs of the Partnership is carried out by an Executive Committee and a Chairperson selected from among the Partners;

(ix) a Partner who becomes disabled continues to be entitled to a partial share in the profits of the Partnership for a set period of time after becoming disabled;

(x) Partners are required to retire upon reaching age XXXXXXXXXX, but are able to remain as part-time Partners for up to XXXXXXXXXX after retirement, with a corresponding reduction in duties and entitlement to profits;

(xi) a Partner can also be deemed to have withdrawn from the Partnership upon the occurrence of a number of events (e.g., death, bankruptcy, etc.) or can be expelled from the Partnership upon the occurrence of certain events (e.g., ceasing to be a member in good standing of the College);

(xii) upon leaving the Partnership a Partner is entitled to be paid certain amounts, including the balance in his, her or its capital account, his, her or its share of net profits for the year in which the withdrawal occurs, and an amount in respect of his, her or its units in the Partnership. Certain Partners may also receive an additional payment upon retirement;

(xiii) each Partner is entitled to an agreed amount of annual vacation time, and also to study leave, special leave and parental leave as specified in the Partnership Agreement;

(xiv) upon leaving the Partnership, a Partner is subject to non-competition and non-solicitation covenants for a period of XXXXXXXXXX months; and

(xv) each Partner is entitled to incorporate a Professional Corporation and to transfer his or her interest in the Partnership to such Professional Corporation, which then becomes a Partner.

6. All of the Partners are residents of Canada. None of the Partners are related persons.

7. XXXXXXXXXX is a CCPC and TCC incorporated under the Corporations Act. All of the shares of XXXXXXXXXX are owned by the Partnership. XXXXXXXXXX was admitted to the Partnership in XXXXXXXXXX as a special member in consideration for the contribution by XXXXXXXXXX to the Partnership of certain equipment used by the Partnership in carrying on the Practice. XXXXXXXXXX currently acts as a bare trustee on behalf of the Partnership for the purpose of being the lessee under certain leases in respect of premises used by the Partnership. XXXXXXXXXX has a special partnership interest not represented by units that entitles it to a fixed share of the income of the Partnership in each year equal to XXXXXXXXXX% of the balance in XXXXXXXXXX capital account at the end of the year in question. XXXXXXXXXX does not have the rights, entitlements, obligations and duties of the other Partners. Each Principal is a director of XXXXXXXXXX.

PROPOSED TRANSACTIONS

Partners to be Allowed to Establish Contracting Companies

8. The Partnership Agreement will be amended to allow Partners to elect to provide their Professional Services to the Partnership through Contracting Companies engaged by the Partnership to provide such services as independent contractors. To implement this change, the Partnership Agreement will differentiate between two functions that each Partner performs: Professional Services and Administrative Responsibilities.

9. Each Electing Partner, or, in the case of Electing Partners that are Professional Corporations, each Principal of an Electing Partner, will incorporate a Contracting Company under the laws of the Province. All Contracting Companies will be licensed to carry on the practice of XXXXXXXXXX in the Province (as described in Paragraph 14, below). None of the Contracting Companies will be related persons. None of the Contracting Companies will be existing Professional Corporations that are Partners. Each Contracting Company will be a TCC and a CCPC. Where an Electing Partner is a Professional Corporation, the Contracting Company formed by the Electing Partner's Principal will be related to and associated with the Electing Partner.

10. Each Partner shall have the right to elect, by notice in writing to the Partnership to be delivered not less than XXXXXXXXXX days prior to the effective date of the notice, to provide his or her Professional Services through a Contracting Company controlled by that Partner (or where that Partner is currently a Professional Corporation, through a second Professional Corporation that will be a Contracting Company controlled directly by the Principal of the Partner).

11. Upon receipt of the notice provided for in Paragraph 10, the Partnership will enter into a written Services Agreement with the Contracting Company for the provision of Professional Services. The terms of each Services Agreement are more particularly described in Paragraph 13 below. The Partnership Agreement will also be amended to prohibit Administrative Responsibilities from being conducted by anyone other than the Partners themselves. All Partners will continue in their capacity as Partners to conduct Administrative Responsibilities for the Partnership.

12. Consequential amendments to the Partnership Agreement will provide that the calculation of an Electing Partner's share of profits for a year will be dependent solely on that Partner's number of units and the Administrative Responsibilities conducted for the Partnership. More specifically, the calculation of an Electing Partner's share of profits will not depend on the Professional Services provided by the Electing Partner's Contracting Company or time spent on Professional activities by the Electing Partner in his or her role as an employee of a Contracting Company. A Non Electing Partner's share of profits of the Partnership will be based on the Partner's number of units, the Administrative Responsibilities conducted for the Partnership and the amount of Professional Services provided by the Non Electing Partner. A more detailed description of the proposed amendments to the Partnership Agreement is set forth in Paragraph 19.

Services Agreement

13. The Partnership will enter into a written Services Agreement with each Electing Partner's Contracting Company. The Services Agreement will only engage the Contracting Company to provide Professional Services to the Partnership. Administrative Responsibilities for the Partnership will continue to be conducted by the Partners and not by the Contracting Companies. The Services Agreement will, among other things, provide for the following:

(i) The Contracting Company will provide Professional Services to the Partnership on a per diem "fee for service" basis as required by the Partnership for its Practice and as set forth in a "Practice Profile" to be attached to the Services Agreement, such fee to be paid directly by the Partnership to the Contracting Company;

(ii) The Practice Profile will express the number of days that a Contracting Company agrees to provide each of the following Professional Services with a per diem rate for each type of service:

i. XXXXXXXXXX;

ii. XXXXXXXXXX;

iii. XXXXXXXXXX; and

iv. other.

The per diem rates will be fair market value rates that will be established for each type of service and may take into account such factors as experience, difficulty and the requirement to work outside of normal hours. The rates will also take into account any supplies, personnel, facilities and equipment provided to the Contracting Company by the Partnership as described in Subparagraph (viii), below;

(iii) There will be a minimum number of work days per year that the Contracting Company agrees to provide services to the Partnership;

(iv) The initial term of each Services Agreement will terminate at the end of the first calendar year. Thereafter, Services Agreements will be automatically and continuously renewed for XXXXXXXXXX terms, with any mutually agreed upon amendments, subject to the termination provisions;

(v) The parties will jointly determine an estimate of the fees payable to the Contracting Company for the Fiscal Year. Based on the estimate, the Partnership will pay the Contracting Company a XXXXXXXXXX payment on account of the fees payable. The Partnership may, from time to time, make additional payments to the Contracting Company in respect of a Fiscal Year as may be necessary to top up the XXXXXXXXXX payment to the amount of fees then estimated to be payable. At the end of the Fiscal Year, the parties will conduct a final reconciliation, if necessary;

(vi) The Contracting Company will invoice the Partnership from time to time for Professional Services rendered under the Services Agreement;
(vii) All payments from third parties received by the Partnership in respect of Professional Services provided by the Contracting Companies will be for the benefit of the Partnership and if any amounts are received by a Contracting Company, they will be remitted to the Partnership;

(viii) The Partnership will provide the Contracting Company with certain supplies, personnel, facilities and equipment that are required for the provision of Professional Services under the Services Agreement. However, Contracting Companies will generally be responsible for the following expenses:

i. professional membership fees and insurance;

ii.continuing education (in particular the expense of professional development and courses for the respective Principal);

iii.transportation;

iv.communication;

v.maintaining the professional standards set by the College and by the Partnership (to the extent necessary for the Contracting Company to fulfil the Services Agreement);

vi.expenditures on personal practice preferences of the Contracting Company;

vii.entertainment expenses connected to the business of the Contracting Company; and

viii.travel expenses including car, accommodation and meal expenses;

(ix) In the event the Contracting Company, or an employee of the Contracting Company, commits an offence that would be considered to be professional misconduct, or if the Contracting Company fails to comply with the terms of the Services Agreement (either of which will constitute a "Default"), the Partnership may suspend the terms of the Services Agreement. The Contracting Company will be provided a period of time (the "Suspension Period") in which to rectify the Default to the satisfaction of the Partnership. If the Default has been rectified prior to the end of the Suspension Period, the Partnership will reinstate the Services Agreement. If the Default has not been rectified at the end of the Suspension Period, the Partnership may terminate the Services Agreement;

(x) On the request of the Contracting Company, the Partnership may, in its sole discretion and in accordance with its internal policies, suspend a Services Agreement for a period of XXXXXXXXXX months (which may in some cases be extended to XXXXXXXXXX months). No amounts will be paid to the Contracting Company during the suspended period. If, following a suspended period, the Contracting Company once again agrees to provide Professional Services to the Partnership, the Services Agreement will be reinstated until the end of the term;

(xi) The Contracting Company or the Partnership may terminate the Services Agreement at any time by providing notice to the other party of not less than XXXXXXXXXX days. If the Contracting Company or the Partnership materially breaches a term of the Services Agreement, the other party may, in its sole discretion, terminate the Services Agreement without notice;

(xii) In the event that a Principal suffers a physical or mental disability such that its Contracting Company is unable to provide the services required of it under the Services Agreement, then the Contracting Company may either: (i) terminate the Services Agreement or (ii) elect to continue to receive payment pursuant to the Services Agreement for the time that such Principal is disabled to a set maximum number of days, provided that the Contracting Company agrees in writing to provide future services to the Partnership for an additional year from the end of the term of the Services Agreement on substantially similar terms and conditions. If the Contracting Company fails to terminate the Services Agreement or elect as described above, the Partnership will have the right to terminate the Services Agreement;

(xiii) In the event of:

i. the death of a Principal; or

ii.the bankruptcy of the Contracting Company or its Principal;

the Partnership shall have the right to immediately terminate the Services Agreement, these terms to be consistent with the terms imposed on any professional corporation providing professional services to the Partnership as an independent contractor;

(xiv) In the event that a Contracting Company cannot provide its services on a particular day to the Partnership under the Services Agreement, the Contracting Company may either:

i. find a replacement person to provide such services to the Partnership on its behalf; or

ii.subcontract with another person to provide services to the Partnership on its behalf.

as the parties may mutually agree. In either case, the person selected by the Contracting Company must be a qualified and licensed individual or an appropriately licensed company employing a qualified individual. Both the Partnership and the Contracting Company shall not unreasonably withhold their consent regarding which of the above methods is chosen. If the parties cannot agree as to which method is to be chosen, the Contracting Company has the final right to decide on the method and, whether or not the Partnership chooses to accept the subcontractor or replacement, the Contracting Company shall be held to have performed the Services Agreement;

(xv) As long as a Contracting Company fully discharges its responsibilities under the Services Agreement, the Contracting Company will not be restricted from providing services to other persons or otherwise prohibited from competing with the Partnership (there may be limited restrictions on the Principal of a Contracting Company, however, see Subparagraph 19(xvi), below).

Requirements for Contracting Companies

14. Each Contracting Company will obtain a permit from the College prior to entering into a Services Agreement with the Partnership. The permit will authorize the Contracting Company to practice XXXXXXXXXX in the Province.

15. XXXXXXXXXX the shares of each Contracting Company will be owned by XXXXXXXXXX.

16. The sole director and President of each Contracting Company will be the Principal that incorporated the Contracting Company.

17. No Principal will be an employee, officer, director or shareholder, either legally or beneficially, of more than one Contracting Company.

18. Each Principal will be an employee of his or her Contracting Company and will provide Professional Services for the benefit of the Contracting Company pursuant to the terms of the Services Agreement with the Partnership. A Principal who provides services for the benefit of his or her Contracting Company will be entitled to receive a salary from his or her Contracting Company. The employment relationship between the Principal and his or her Contracting Company will be evidenced by a written employment agreement.

Amendments to Partnership Agreement

19. There will be numerous consequential amendments to the Partnership Agreement in support of the proposed transactions described above. These consequential amendments will include, but will not be restricted to, the following:

(i) Section XXXXXXXXXX of the Partnership Agreement will be amended to provide that XXXXXXXXXX."

(ii) Section XXXXXXXXXX will be amended to refer to all Partners conducting Administrative Responsibilities on behalf of the Partnership. For Professional Services, the Partnership Agreement will recognize that Partners may choose to either continue to provide Professional Services as Partners (i.e., as Non Electing Partners) or elect to provide such services through a Contracting Company on an independent contractor basis (i.e., Electing Partners). All Partners must continue to conduct his, her or its Administrative Responsibilities as Partners of the Partnership. Definitions will be added to the Partnership Agreement for Electing Partners, Non Electing Partners, Professional Services and Administrative Responsibilities.

(iii) Consistent with Subparagraph (ii), above, section XXXXXXXXXX of the Partnership Agreement will be amended to provide that each Partner will spend the time required to complete his, her or its Administrative Responsibilities. In addition, the Partnership Agreement will require Non Electing Partners to spend the time necessary to provide the Professional Services.

(iv) Section XXXXXXXXXX will be amended to refer to "Non Electing Partners" rather than "Active Partners".

(v) Article XXXXXXXXXX of the Partnership Agreement (Financial Participation and Modification of Duties) will be amended to reflect that all Partners will receive allocations of net Partnership profits based on number of Partnership units and Administrative Responsibilities performed, and only Non Electing Partners will receive allocations based on time spent providing Professional Services.

(vi) Section XXXXXXXXXX will be amended to apply only to Non Electing Partners. The ability to reallocate the provision of Professional Services among the Partners will be expanded to allow the Partners to agree to allocate the provision of Professional Services to independent contractors, including Contracting Companies.

(vii) Section XXXXXXXXXX will be amended to allow Non Electing Partners to be excused from providing Professional Services and for all Partners to be excused from his, her or its Administrative Responsibilities.

(viii) Subsection XXXXXXXXXX will be amended to ensure that determining XXXXXXXXXX workload takes into account both Non Electing Partners and independent contractors, including Contracting Companies. All Partners are to be taken into account in determining workload related to Administrative Responsibilities.

(ix) A provision will be added to section XXXXXXXXXX to require a Special Resolution of Partners before the Partnership enters into, amends or renews a contract for services with any professional corporation providing professional services to the Partnership as an independent contractor.

(x) Section XXXXXXXXXX will be amended to add that the decision to terminate a contract for services with any professional corporation providing professional services to the Partnership as an independent contractor by the Partnership for breach will require the unanimous approval of Partners.

(xi) Section XXXXXXXXXX will be amended to reflect the fact that the Partnership will have the right, subject to obtaining approval, to enter into Services Agreements with Contracting Companies established by Electing Partners.

(xii) Article XXXXXXXXXX (Payment on Withdrawal) will require amendment to deal with Electing Partners and the earning of income through Contracting Companies. Numerous amendments to the definitions will also be required (for example, XXXXXXXXXX).

(xiii) Section XXXXXXXXXX will be amended to only calculate the sale price on a buy back of units. Income related to any purchased units will be allocated based on the number of units and the time spent for Administrative Responsibilities. Section XXXXXXXXXX will be deleted.

(xiv) Article XXXXXXXXXX (Disability) will require some revision but it will continue to apply for the Administrative Responsibilities conducted by all Partners and for the Professional Services provided by Non Electing Partners.

(xv) Article XXXXXXXXXX (Semi Retirement) and Article XXXXXXXXXX (Leaves of Absence and Vacation) will only apply to Non Electing Partners for Professional Services and will apply to all Partners for Administrative Responsibilities.

(xvi) Article XXXXXXXXXX (Restrictive Covenants) will be amended to stipulate that no Partner will provide XXXXXXXXXX services, either directly or indirectly, to the XXXXXXXXXX. However, the Partnership Agreement will not prohibit Partners from providing XXXXXXXXXX services to any other person or entity in XXXXXXXXXX or elsewhere, provided that the Partners or their Contracting Companies otherwise meet all of their duties under the Partnership Agreement or Services Agreement.

Named Partner

20. The Named Partner will elect to provide his Professional Services to the Partnership through a Contracting Company (the "Particular Contracting Company").

21. The Particular Contracting Company will enter into a Services Agreement with the Partnership in respect of Professional Services to be provided by the Particular Contracting Company. The fees payable to the Particular Contracting Company by the Partnership will be determined as described above.

22. The Particular Contracting Company will employ the Named Partner to provide Professional Services for its benefit, pursuant to a written employment agreement, with a view to fulfilling its obligations to the Partnership in accordance with its Services Agreement with the Partnership.

23. Partnership allocations to the Named Partner will be based solely on the number of Partnership units held by the Named Partner and Administrative Responsibilities performed.

XXXXXXXXXX PARTNERSHIP TRANSACTIONS

We understand that you anticipate certain transactions (the "XXXXXXXXXX Partnership Transactions") will take place at or around the same time as the Proposed Transactions described above. However, you have informed us that these transactions are separate from and not materially relevant to the Proposed Transactions or the rulings requested with respect to the Proposed Transactions. The XXXXXXXXXX Partnership Transactions are described below only for purposes of completeness.

24. The Principals will cause the XXXXXXXXXX Partnership to be formed as a limited partnership under the laws of the Province. The general partner of the XXXXXXXXXX Partnership will be a newly incorporated company, the shareholder of which will be the then Chairman of the Partnership. Upon its formation the XXXXXXXXXX Partnership will have XXXXXXXXXX limited partners. Each of the Principals will nominate either themselves or a newly formed family trust to be their designated limited partner for the XXXXXXXXXX Partnership. The beneficiaries of any newly formed family trusts will be limited to any one or more of the Principal, his or her spouse and his or her children. The partners of the XXXXXXXXXX Partnership will enter into a written partnership agreement. The XXXXXXXXXX Partnership will be engaged in the business of providing XXXXXXXXXX services (i.e. the XXXXXXXXXX ) to the Partnership relating to the carrying on of the Practice.

25. The XXXXXXXXXX Partnership will enter into a XXXXXXXXXX services agreement with the Partnership whereby the XXXXXXXXXX Partnership will provide all XXXXXXXXXX services (the "XXXXXXXXXX Services") required by the Partnership in connection with the Practice. For this purpose, the XXXXXXXXXX Partnership will employ and pay all XXXXXXXXXX and support staff as are required to provide the XXXXXXXXXX Services. Any staff members currently working for the Partnership whose function relates to the provision of XXXXXXXXXX services will become employed by the XXXXXXXXXX Partnership. In addition, any equipment owned or leased by the Partnership and necessary to provide XXXXXXXXXX services will be leased or subleased (as the case may be) to the XXXXXXXXXX Partnership at reasonable fair market value rents in order to allow the XXXXXXXXXX Partnership to carry on the business of providing XXXXXXXXXX services.

26. The Partnership will bill XXXXXXXXXX and other payors for all services it provides. In turn, the XXXXXXXXXX Partnership will charge a fee to the Partnership for providing the XXXXXXXXXX Services (the "XXXXXXXXXX Fee"). The XXXXXXXXXX Partnership will provide an invoice to the Partnership in respect of the XXXXXXXXXX Services on or around the XXXXXXXXXX of each month, with each monthly invoice to indicate the XXXXXXXXXX Fee for the immediately preceding month. The Partnership will be required to pay the amount of the invoice on the XXXXXXXXXX of the month in which the invoice is provided.

PURPOSE OF PROPOSED TRANSACTIONS

27. The primary objective of the Proposed Transactions is to allow the Partners to use Professional Corporations to earn professional income as independent contractors with minimal disruption to the business arrangements of the Partnership. This provides a number of advantages, including:

(i) providing each Partner with an increased level of control over his or her participation in the Practice through individual management of personal practice preferences;

(ii) permitting each Partner to have control over expenditures where such expenditures may not be in the interest of all participants in the Practice; and

(iii) providing Partners with more control over their estate and financial planning.

The benefit of these transactions to the Partnership is that they enhance the Partnership's ability to retain and recruit Professionals.

RULINGS GIVEN

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions,

(b) the proposed transactions are completed in the manner described above, and

(c) there are no other transactions which may be relevant to the rulings requested,

our rulings are as follows:

A. The execution and implementation of the proposed transactions described above, in and by themselves, will not constitute a disposition of part or all of an interest in the Partnership by any Partner for purposes of the Act.

B. The sharing of income between the Partners of the Partnership will not be subject to adjustment pursuant to subsection 103(1) of the Act solely as a result of an Electing Partner, or the Principal of an Electing Partner, as applicable, being allowed, pursuant to amendments to the Partnership Agreement, to incorporate a Professional Corporation and provide all of his or her Professional Services to the Partnership through that Professional Corporation for a fee.

C. The execution and implementation of the proposed transactions, of and by themselves, will not be sufficient to create a non-arm's length relationship between the Partners with respect to sharing the Partnership profits for income tax purposes.

D. Subject to sections 18 and 67 of the Act, the fees payable by the Partnership to the Contracting Companies as described in Subparagraphs 13(i) and (ii), above, will be deductible by the Partnership in its determination of the Partnership income for purposes of subsection 96(1) of the Act.

E. The transactions undertaken in Paragraphs 8 and 13, above, and in particular the payments described in Subparagraphs 13(i) and (ii), will not in and by themselves cause subsections 56(2), 56(4) or 246(1) of the Act to apply so as to cause an amount received by the Contracting Companies under the Services Agreements to be taxed as income in the hands of a Partner.

F. Provided that a Principal providing Professional Services to the Partnership through a Contracting Company would not, but for the existence of the Contracting Company, be an officer or employee of the Partnership in respect of those services, then the Contracting Company will not be considered to be carrying on a personal services business as defined in subsection 125(7) of the Act.

G. Provided that a partnership does not exist between any of the Contracting Companies, the income earned by a Contracting Company, and in particular the income described in Subparagraphs 13(i) and (ii), above, will not be specified partnership income as defined in subsection 125(7) of the Act.

H. Implementation of the Proposed Transactions, in and by themselves, will not result in the application of the provisions of subsection 245(2) of the Act to re-determine the tax consequences confirmed in the rulings given above.

Comments

The application of subsection 256(2.1) of the Act is determined on a year-to-year basis. We are therefore unable to rule that this provision will never apply to the Contracting Companies. In general, where a particular function of a professional partnership that was previously carried on by the partnership is subsequently carried on by a partner's professional corporation, and no longer in partnership, for bona fide reasons other than income tax, this fact, in and of itself, would generally not cause subsection 256(2.1) of the Act to be applicable. The reasons for the separate existence of two or more professional corporations or the reasons for a change in the functions performed directly by the partners of the professional partnership is a question of fact that can only be determined on a case-by-case basis. However, based on the facts and proposed transactions described herein, it is our view that the incorporation of the Contracting Companies to provide the Professional Services to the Partnership will not, in and of itself, cause subsection 256(2.1) of the Act to be applicable to the Contracting Companies. We note that, as stated in Paragraph 9, where an Electing Partner is a Professional Corporation, the Contracting Company formed by the Electing Partner's Principal will be related to and associated with the Electing Partner.

Whether or not a Principal who is providing his or her Professional Services to the Partnership through a Contracting Company would, but for the existence of that Company, be an employee of the Partnership or an independent contractor who has entered into a contract for services with the Partnership is a question of fact that can only be determined after a review of the actual agreements entered into between the Contracting Company and the Partnership, and between the Contracting Company and the Principal. This review and determination is the responsibility of the Principal's local tax services office.

The attribution rules in sections 74.1 to 74.4 of the Act apply in situations where property is transferred or lent, directly or indirectly, to a spouse or child. These rules may apply to any income received by a spouse, or a child who has not attained the age of 18 years before the end of a particular taxation year. Whether or not these rules will apply in respect of the ownership of any shares of a Contracting Company, as described in paragraph 15 above, is a question of fact that can only be determined at the time that the shares are issued or property is lent or transferred to such a shareholder. Furthermore, subsection 56(2) of the Act may apply to any amounts paid by a Contracting Company to a family member of the Principal who incorporated the Contracting Company. Also, section 120.4 of the Act may apply with respect to taxable dividends or trust income in respect of taxable dividends from a Contracting Company received in a taxation year by a family member of a Principal who has not attained the age of 17 years before that year.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the proposed transactions are implemented on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, this advance income tax ruling does not imply acceptance, approval or confirmation of the income tax implications of the transactions set out in Paragraphs 24 to 26.

Yours truly,

XXXXXXXXXX
Section Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch