2007 Ruling 2007-0236451R3 - Partnership Reorg-Personal Services Business

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: Question of fact. Generally, yes, if certain conditions are met.

Reasons: Reading of relevant legislation and consistent with other rulings

XXXXXXXXXX 									2007-023645

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX and its partners. We also acknowledge the additional information provided to us in your numerous electronic mail transmissions and during our telephone conversations (XXXXXXX).

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 Partnership, any of the Partners or a related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed return of the Partnership, any of the Partners 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 previously issued ruling.

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

DEFINITIONS

In this letter, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supplement), c.1, as amended to the date hereof;

(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) finding new business and new clients for the Partnership, (ii) maintaining a principal connection with clients of the Partnership and delegating work to other XXXXXXXXXX or Contracting Companies, (iii) maintaining a direct and material relationship with clients of the Partnership, (iv) XXXXXXXXXX, (v) XXXXXXXXXX, (vi) building client service teams, (vii) practising efficiently, (viii) developing new areas of expertise, (ix) promoting, and contributing to the growth of, the Practice, (x) conducting management functions, (xi) educating Professionals and staff, (xii) enhancing the Partnership's profile, and (xiii) collecting accounts from the Partnerships' clients with which a Partner has a direct and material relationship;

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

(d) XXXXXXXXXX;

(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) "common-law partner" has the meaning assigned by subsection 248(1) of the Act;

(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 and collectively, they are referred to as "Contracting Companies";

(i) "Corporations Act" means The Corporations Act XXXXXXXXXX;

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

(k) "Electing Partners" means those Partners who elect to provide Professional Services to the Partnership through a Contracting Company, as more particularly described in Paragraphs 9 and 10;

(l) "Executive Board" shall mean the executive board of the Partnership, as more particularly described in Subparagraphs 4(p) and (q);

(m) "Extraordinary Majority" means a majority, of those Partners present in person or represented by proxy at a meeting, of over XXXXXXXXXX% in number who also hold over XXXXXXXXXX% of the Issued Units;

(n) "Fiscal Year" means the fiscal year of the Partnership for accounting purposes, being XXXXXXXXXX;

(o) "Issued Units" refers to a XXXXXXXXXX used by the Partnership and more fully described in Subparagraphs 4(b) to (f);

(p) XXXXXXXXXX;

(q) XXXXXXXXXX;

(r) XXXXXXXXXX;

(s) "Limited Liability Partnership" means a partnership formed pursuant to the Partnership Act and registered under the XXXXXXXXXX as a limited liability partnership;

(t) "XXXXXXXXXX Partnership" means XXXXXXXXXX, a limited partnership that was formed pursuant to the Partnership Act;

(u) "Managing Partner" means the managing partner of the Partnership;

(v) "Named Partner" means XXXXXXXXXX, which is a Partner. The Named Partner's Business Number is XXXXXXXXXX and its address is XXXXXXXXXX. The Named Partner files its income tax returns with the XXXXXXXXXX Taxation Centre. The Principal of the Named Partner is XXXXXXXXXX . His address is XXXXXXXXXX. His social insurance number is XXXXXXXXXX and he files his income tax returns with the XXXXXXXXXX Taxation Centre;

(w) "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;

(x) "Non Unit Partner" means a XXXXXXXXXX that is associated with the Partnership but who has no Issued Units. They include former Partners who have reached mandatory retirement age from the Partnership, but remain with the Partnership, and retired Partners (being former Partners who have become inactive members with the XXXXXXXXXX) who choose to continue to have a relationship with the Partnership. Non Unit Partners are not the subject of this ruling;

(y) "Ordinary Majority" means a majority, of those Partners present in person or represented by a proxy at a meeting, of over XXXXXXXXXX% in number who also hold over XXXXXXXXXX% of the Issued Units;

(z) "Paragraph" refers to a numbered paragraph in this letter;

(aa) "Partner" means a Professional or a Professional Corporation that is currently a partner of the Partnership, and collectively they are referred to as the "Partners". Schedule A to your XXXXXXXXXX, letter to us listed all of the Partners. For greater certainty, the definition of "Partner" does not include a "Non Unit Partner";

(bb) "Partnership" means the partnership, which currently carries on the Practice under XXXXXXXXXX a registered Limited Liability Partnership pursuant to the laws of the Province;

(cc) "Partnership Act" means The Partnership Act XXXXXXXXXX;

(dd) "Partnership Agreement" means the Amended and Restated Articles of Partnership entered into among the Partners and dated XXXXXXXXXX, as amended from time to time, as more particularly described in Paragraph 4;

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

(ff) "Practice" means the services currently provided by the Partnership, being the provision of Professional Services and also includes the Administrative Responsibilities conducted by the Partners that are necessary to carry on the professional practice;

(gg) "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;

(hh) "Professional" means a XXXXXXXXXX who is licensed pursuant to the XXXXXXXXXX to provide XXXXXXXXXX services in the Province and who is qualified as a XXXXXXXXXX;

(ii) "Professional Corporation" means a corporation that is incorporated under the laws of the Province and is licensed pursuant to the XXXXXXXXXX to provide XXXXXXXXXX services in the Province;

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

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

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

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

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

(oo) "Signed Resolution" means a written resolution signed by XXXXXXXXXX% of the Partners who hold at least XXXXXXXXXX% of the Issued Units;

(pp) "Subparagraph" refers to a numbered subparagraph in this letter;

(qq) "Tax Year" means the fiscal period of the Partnership for income tax purposes, being XXXXXXXXXX; and

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

FACTS

1. The Partnership carries on the Practice in the Province as a Limited Liability Partnership. The Partnership currently has XXXXXXXXXX Partners, XXXXXXXXXX of whom are individual XXXXXXXXXX and XXXXXXXXXX of whom are Professional Corporations. In the case of each of these Professional Corporations, an individual XXXXXXXXXX, who is the Principal of the particular Professional Corporation, owns all of the voting shares.

2. The Practice is carried on from the Partnership's business office in the City. In addition to the Partners, the Partnership currently has XXXXXXXXXX Non Unit Partners and approximately XXXXXXXXXX or Professional Corporations who are not Partners, but who provide XXXXXXXXXX services to the Partnership.

3. The Partnership's filer identification number is XXXXXXXXXX. The Partnership files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. The main office of the Partnership is located at

XXXXXXXXXX.

4. The Partnership is governed by the Partnership Agreement, the key terms of which are as follows:

(a) although every Partner has an ownership interest in the Partnership, these interests are not specifically represented by "units" in the Partnership;

(b) there are a total of XXXXXXXXXX Issued Units in the Partnership;

(c) the Issued Units refers to a XXXXXXXXXX used by the Partnership XXXXXXXXXX of Partners and the amount that each Partner contributes to his, her or its XXXXXXXXXX (see Subparagraph 4(f)). These XXXXXXXXXX, or "Issued Units" are XXXXXXXXXX;

(d) the number of Issued Units held by each Partner is based on XXXXXXXXXX. This determination is made for XXXXXXXXXX;

(e) a Partner is entitled to one vote for each Issued Unit held by that Partner on matters that come before a meeting of Partners;

(f) in order to provide funds for the financing of the Partnership, each Partner is XXXXXXXXXX;

(g) income is allocated and distributed to Partners based on a calculation of XXXXXXXXXX;

(h) XXXXXXXXXX;

(i) XXXXXXXXXX, each Partner will be allocated XXXXXXXXXX% of his, her or its collected billings on an adjusted basis for the Fiscal Year, which are collected by XXXXXXXXXX in excess of their pro rata share of a XXXXXXXXXX;

(j) XXXXXXXXXX;

(k) XXXXXXXXXX;

(l) Partners of the Partnership may either be: (i) individual XXXXXXXXXX or (ii) Professional Corporations that meet specific criteria set forth in the XXXXXXXXXX and in the Partnership Agreement;

(m) Partners are generally required to retire as a Partner at age XXXXXXXXXX. Depending on the number of years such person has been a Partner, he, she or it may be entitled to receive a retiring allowance from the Partnership. To be eligible to receive 100% of the retiring allowance, a Partner must have XXXXXXXXXX;

(n) in the event a Partner dies or retires from the Partnership, that Partner (or the legal representative of that Partner) shall be entitled to XXXXXXXXXX;

(o) Partner meetings are to occur at least XXXXXXXXXX times per year and additional meetings may be called by any of: (i) the Chair of the Executive Board, (ii) the Executive Board, (iii) the Managing Partner or (iv) a specified number of Partners or Partners holding a specified number of Issued Units (as set forth in the Partnership Agreement). Quorum for a meeting of Partners requires Partners present in person or represented by proxy being more than XXXXXXXXXX% of the Partners in number and holding more than XXXXXXXXXX% of the Issued Units. Unless the Partnership Agreement requires an Extraordinary Majority, resolutions are to be determined by an Ordinary Majority;

(p) management of the affairs of the Partnership is carried out by the Executive Board and the Managing Partner. The Executive Board is comprised of XXXXXXXXXX Partners, one of whom is selected to be the Chair. The members of the Executive Board are elected by the Partners and the Executive Board in turn selects a Managing Partner which individual must be confirmed by the Partners. Both the Executive Board and the Managing Partner are paid by the Partnership for the services they provide. These payments are in the form of an additional allocation of Partnership income;

(q) the Executive Board is responsible to ensure competent management of the business and affairs of the Partnership and for the overall operations of the Partnership;

(r) the Managing Partner is responsible to the Partners and the Executive Board for the management of the business and affairs of the Partnership, including: (i) ensuring that the Partnership operates consistently with its overall goals, plans and objectives and (ii) ensuring that current and long range directions and strategies are in concert with the Executive Board. The role of the Managing Partner is to be defined from time to time by the Executive Board. The term of office for the Managing Partner is XXXXXXXXXX years. The Executive Board selects a candidate for the position of Managing Partner and presents the candidate to the Partners for ratification by either an Ordinary Majority at a meeting or by Signed Resolution;

(s) the Partners are responsible for, and have the authority to approve, inter alia:

(i) admission of new Partners;

(ii) removal of Partners;

(iii) mergers, acquisitions and strategically significant associations;

(iv) the principles of income distribution to Partners;

(v) minimum income amounts for Partners;

(vi) changes in the financing structure of the Partnership;

(vii) the selection and removal of the members of the Executive Board; and

(viii) approving the appointment of the Managing Partner, compensation arrangements with the Managing Partner and the removal of the Managing Partner;

(t) a Partner can be expelled from the Partnership if such action is approved by an Extraordinary Majority at a meeting of Partners or by Signed Resolution;

(u) upon ceasing to be a Partner, that person is entitled to be paid certain amounts, including his, her or its share of net profits for the year in which the Partner ceases to be Partner and XXXXXXXXXX;

(v) an amendment to the Partnership Agreement must be approved by either an Extraordinary Majority at a meeting or by Signed Resolution; and

(w) with the approval of the Partners by either Ordinary Majority at a meeting or by Signed Resolution, a person may be invited by the Executive Board to become a Non Unit Partner. Non Unit Partners are not entitled to vote and their share in profits of the Partnership is equal to a fixed percentage of their collected billings.

5. All of the Partners are residents of Canada. No Partner is a "related person" to any other Partner with the exception of XXXXXXXXXX Professional Corporations, the Principals of which are XXXXXXXXXX.

6. The Partnership has entered into a XXXXXXXXXX agreement with the XXXXXXXXXX pursuant to which the XXXXXXXXXX has agreed to provide to the Partnership all XXXXXXXXXX relating to the XXXXXXXXXX component of the Practice. In exchange for receiving such services, the Partnership is required to reimburse the XXXXXXXXXX for all costs incurred by the XXXXXXXXXX in providing the services plus an amount equal to XXXXXXXXXX% of such costs. The XXXXXXXXXX employs approximately XXXXXXXXXX required in the operation of the XXXXXXXXXX component of the Practice. The XXXXXXXXXX that currently has XXXXXXXXXX limited partners. Each Principal may nominate themselves or a family trust to be their designated XXXXXXXXXX of the XXXXXXXXXX.

7. The Partnership is the sole shareholder of XXXXXXXXXX a corporation incorporated under the Corporations Act. XXXXXXXXXX holds the leasehold interest to the office space used by the Partnership to conduct its Practice. The Partnership is also the sole shareholder of XXXXXXXXXX, a corporation incorporated under the Corporations Act. If the Partnership determines that it is necessary to XXXXXXXXXX corporation that is wholly owned by the Partnership. XXXXXXXXXX

PROPOSED TRANSACTIONS

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 15). None of the Contracting Companies will be related persons, with the potential exception of XXXXXXXXXX Contracting Companies whose Principals would be common-law partners. 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 a related person to the Electing Partner and will also be associated with the Electing Partner.

10. Each Partner shall have the right to elect, on the commencement of each Fiscal Year of the Partnership, by notice in writing to the Partnership to be delivered not less than XXXXXXXXXX days prior to the commencement of the Fiscal Year, 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 Service Agreement are more particularly described in Paragraph 13. 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. The Partnership Agreement will be amended to prohibit the transfer, conveyance, or issuance of an interest in the Partnership to any Contracting Company.

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

13. The Partnership will enter into a written Services Agreement with each Electing Partner's Contracting Company (or where the Electing Partner is currently a Professional Corporation, with the Contracting Company controlled directly by the Principal of that Electing Partner). 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:

(a) The Contracting Company will provide Professional Services to the Partnership as required by the Partnership for its Practice. In return for these Professional Services, the Partnership will pay fees directly to the Contracting Company. The amount of the fees to be paid to each Contracting Company will be equal to the fair market value of the Professional Services it provides and will be based on XXXXXXXXXX in respect of those services provided by the Contracting Company;

(b) The terms of each Services Agreement will be negotiated by the Partnership separately with each Contracting Company. The rate to be charged by the Partnership to its clients for Professional Services provided by each Contracting Company to the Partnership's clients will be fair market value rates and may take into account difficulty and the experience and areas of specialty of the Principal of the Contracting Company providing the Professional Services to the Partnership's clients;

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

(d) The parties will jointly determine an estimate of the fees payable to a 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;

(e) The Contracting Company will invoice the Partnership from time to time for Professional Services rendered under the Services Agreement;

(f) 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 a Contracting Company receives any amounts, they will be remitted to the Partnership;

(g) Contracting Companies will generally be responsible for, among other things, the following expenses:

(i) office;

(ii) secretarial and administrative support;

(iii) office equipment and supplies;

(iv) professional membership fees and insurance;

(v) transportation;

(vi) communication;

(vii) maintaining the professional standards set by the XXXXXXXXXX and the Partnership (to the extent necessary for the Contracting Company to fulfill the Services Agreement);

(viii) expenditures on personal practice preferences of the Contracting Company;

(ix) entertainment expenses connected to the business of the Contracting Company; and

(x) travel expenses, including car, accommodation and meal expenses.

(h) Both the Contracting Company and the Partnership may terminate the Services Agreement at any time by providing notice to the other party of not less than XXXXXXXXXX days;

(i) In the event of:

i. the death of a Principal;

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

iii a material breach by the Contracting Company under the Services Agreement;

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; and

(j) 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.

14. The Contracting Company may also choose to enter into an XXXXXXXXXX with the Partnership whereby the Contracting Company can XXXXXXXXXX from the Partnership for XXXXXXXXXX. The XXXXXXXXXX will be automatically renewed on an annual basis. However, the Partnership may terminate the XXXXXXXXXX at any time on XXXXXXXXXX days notice to the Contracting Company and the Contracting Company may terminate the XXXXXXXXXX at any time on XXXXXXXXXX months notice to the Partnership.

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

16. All of the voting shares of each Contracting Company will be owned by the Principal that incorporated the Contracting Company. The only exception is that if a Principal's spouse or child is a XXXXXXXXXX, the Principal's spouse or child (as the case may be) may also own voting shares in the Principal's Contracting Company. Non-voting shares of Contracting Companies may be owned by a Principal's spouse and/or children or by a holding company, the shareholders of which are any one or more of the Principal, the Principal's spouse and/or children.

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

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

19. 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.

20. The Named Partner will elect to provide its 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 in Paragraph 13.

22. The Particular Contracting Company will employ the Principal of 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. Consistent with Paragraph 12, the allocation of Partnership profits to the Named Partner will be based solely on the Administrative Responsibilities performed by the Named Partner. It will not depend on the Professional Services provided by the Contracting Company of the Principal of the Named Partner, or time spent by the Principal on professional activities in his or her role as an employee of the Contracting Company.

PURPOSE OF THE PROPOSED TRANSACTIONS

24. 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 or its 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 estate and financial planning.

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

RULINGS

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 of 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. Provided the amount of the Partnership's income allocated to the Named Partner is otherwise reasonable, having regard to all the relevant circumstances, the Named Partner's share of the Partnership's income will not be altered, pursuant to subsection 103(1) of the Act, solely as a result of the Named Partner choosing, pursuant to amendments to the Partnership Agreement, to provide all of its Professional Services to the Partnership through the Particular Contracting Company, all as described above in the proposed transactions.

C. The execution and implementation of the proposed transactions described above, will not, in and of themselves, create a non-arm's length relationship between the Named Partner and the other Partners with respect to sharing the Partnership's income for income tax purposes.

D. Subject to sections 18 and 67 of the Act, the fees payable by the Partnership to the Particular Contracting Company pursuant to a Services Agreement, as described in Subparagraphs 13(a) and (d), will be deductible by the Partnership in its determination of the Partnership's income for purposes of subsection 96(1) of the Act.

E. The transactions undertaken in Paragraphs 8 to 13, and 20 to 23, and in particular the fee payments described in Subparagraphs 13(a) and (d), will not in and of themselves cause subsections 56(2), 56(4) or 246(1) of the Act to apply so as to cause an amount of the fees received by the Particular Contracting Company under a Services Agreement to be taxed as income in the hands of the Named Partner.

F. Provided that the Principal of the Named Partner that provides Professional Services to the Partnership through the Particular Contracting Company would not, but for the existence of the Particular Contracting Company, reasonably be regarded as an officer or employee of the Partnership in respect of those services, then the Particular Contracting Company will not be considered to be carrying on a personal services business.

G. Provided the Particular Contracting Company was not a member of any partnership in the relevant year, the fee income earned by the Particular Contracting Company pursuant to a Services Agreement, as described in Subparagraphs 13(a) and (d), will not be specified partnership income.

H. Implementation of the proposed transactions described above, will not, in and of themselves, 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.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA 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 to the Act which, if enacted, could have an effect on the rulings provided herein.

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 CRA has agreed to or accepted the reasonableness or fair market value of any fees or expenditures referred to in this letter.

ADDITIONAL COMMENTS

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 Contracting 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 all of the relevant facts, including 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 16, 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. At this time we do not have sufficient information to make any such determinations.

OPINION

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.

In accordance with paragraph 22 of Information Circular 70-6R5, the comments in the immediately preceding paragraph 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 CRA.

Yours truly,

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