2008 Ruling 2007-0256851R3 - 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: Whether a professional corporation, providing XXXXXXXXXX services to another corporation, will be carrying on a "personal services business" within the meaning thereof in subsection 125(7) of the Act.

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

Reasons: Reading of the definition in subsection 125(7) and consistent with similar rulings previously given.

XXXXXXXXXX 								2007-025685

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX [Partnership #XXXXXXXXXX ]
XXXXXXXXXX [the "Partners"]
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 (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 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) "adjusted cost base" has the meaning assigned by section 54 of the Act;

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

(d) "City" means the XXXXXXXXXX ;

(e) "XXXXXXXXXX Manager" means the XXXXXXXXXX manager of the Partnership as described in Paragraph 5(b);

(f) XXXXXXXXXX ;

(g) "Contracting Company" means a Professional Corporation that carries on the practice of XXXXXXXXXX through the employment of an individual Professional, and that enters into an independent contractor relationship with Newco to provide such professional services to Newco (as more particularly described in Paragraph 27);

(h) "Contracting Professional" means an individual who is a Professional and who carries on the practice of XXXXXXXXXX , and who enters into an independent contractor relationship with Newco to provide such professional services to Newco (as more particularly described in Paragraph 23);

(i) "Corporations Act" means XXXXXXXXXX ;

(j) "cost amount" has the meaning assigned by subsection 248(1) of the Act;

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

(l) XXXXXXXXXX ;

(m) "Elected Amount Parameters" means, with respect to any transfer of assets in respect of which the transferor and the transferee have elected to have the provisions of section 85 of the Act apply, the limits on the "agreed amounts" that the transferor and transferee may select in respect of the transfer that are stipulated in section 85 of the Act, being the following:

i. for non-depreciable capital property and inventory, an amount not less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

ii. for eligible capital property, an amount not less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act;

iii. for depreciable capital property, an amount not less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) of the Act;

iv. for all types of property, an amount not exceeding the fair market value of the property in question; and

v. for all types of property, an amount not less than the fair market value of any non-share consideration received by the transferor from the transferee in respect of such property;

(n) "Family" in respect of a Partner means the Partner's spouse or common law partner, the Partner's children and the Partner's parents;

(o) XXXXXXXXXX

(p) "Managing Partner" means the managing partner of the Partnership as described in Paragraph 5(a);

(q) XXXXXXXXXX

(r) "Newco" means a new Professional Corporation to be incorporated pursuant to the laws of the Province, as more particularly described in Paragraph 9;

(s) XXXXXXXXXX

(t) "paid-up capital" has the meaning assigned by subsection 89(1) of the Act;

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

(v) "Partner" means any one of

			Social Insurance #		Address
			XXXXXXXXXX 				XXXXXXXXXX 

each of whom is currently a partner of the Partnership. Collectively they are referred to as the "Partners".

(w) "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;

(x) "Partnership Agreement" means the agreement governing the business activities of the Partnership. The terms of the Partnership Agreement are outlined in the copy of the draft partnership agreement that was provided to us with the ruling request, but which the Partners have not formalized by signing.

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

(z) "Practice" means the activities currently undertaken by the Partnership, being the professional practice of XXXXXXXXXX and at certain other locations within the Province;

(aa) "Professional" means an individual XXXXXXXXXX ;

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

(cc) "Professional Employee" means a Professional who enters into an employment relationship with Newco for the provision of XXXXXXXXXX services to Newco;

(dd) "Province" means the Province of 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; and

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

FACTS

1. The Partnership was originally formed in XXXXXXXXXX . The Partnership carries on the Practice and only has the XXXXXXXXXX Partners.

2. The Practice is currently carried on by the Partners at XXXXXXXXXX and at other facilities in the City. In addition to the Partners, there are a number of Professionals or Professional Corporations who are not Partners but who provide XXXXXXXXXX services to the Partnership. There are also a number of XXXXXXXXXX , support staff and management staff employed by the Partnership to undertake the various XXXXXXXXXX , administrative and management tasks required in the operation of the Practice.

3. XXXXXXXXXX

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

5. The Partnership operates pursuant to the principles set forth in the Partnership Agreement. The key terms pursuant to which the Partnership operates are as follows:

(a) each year the Partners elect one Partner to act as Managing Partner of the Partnership. The Managing Partner is granted time away from his or her other duties to manage the Partnership and/or is paid a monthly amount set by the Partners for those services. The current Managing Partner is XXXXXXXXXX ;

(b) the Partnership Agreement also contemplates the appointment of the XXXXXXXXXX Manager. The XXXXXXXXXX Manager is responsible for managing the administrative affairs and non-professional human resource issues of the Partnership;

(c) the fiscal year end of the Partnership is XXXXXXXXXX ;

(d) at the end of each fiscal year, the Partnership's chartered accountants (the "Accountants") examine the internal financial statements of the Partnership and together with the Managing Partner make any agreed upon necessary revisions which arise from such review;

(e) at an annual meeting of Partners, the Accountants present the financial statements for the Partnership and the allocation of net income or loss of the Partnership for the year;

(f) all Partners generally share equally in the net income or loss of the Partnership unless otherwise agreed by the unanimous vote of the Partners. Part-time Partners share in the net income or loss of the Partnership on a pro-rated basis;

(g) the Partnership may make a cash call on Partners to fund losses or to return any excess net income paid out to Partners with the affirmative vote of XXXXXXXXXX % of the Partners present at a meeting of Partners. If a Partner fails to make a required cash call, such Partner will be liable to reimburse the remaining Partners or the Partnership for the deficiency and may be expelled from the Partnership;

(h) Partner meetings are held monthly. At each meeting the Managing Partner presents a year to date balance sheet and a review of year to date finances (including revenues, expenses, income, assets, liabilities, income accounts and capital accounts). The monthly draw of Partners (which is generally equal for all Partners but pro-rated for part-time Partners) is also reviewed;

(i) each Partner is responsible for the advice, examinations and XXXXXXXXXX rendered by the Partner. Each Partner indemnifies the other Partners and the Partnership from all fines, suits, claims, actions, damages and fees which may arise directly or indirectly from such Partner's practice;

(j) each Partner must devote a proportion of his or her time and effort approximately equal to the time and effort devoted by the other Partners to the business of the Partnership. Partners must participate in work schedules and XXXXXXXXXX schedules, which are arranged by the Managing Partner or his/her designee;

(k) a Partner may provide XXXXXXXXXX services outside of the Partnership and earn income outside of the Partnership, or as less than a full time Partner, with the affirmative vote of XXXXXXXXXX % of the Partners in attendance at a meeting of Partners. Work outside the Partnership includes XXXXXXXXXX work performed on weekends, statutory holidays and on a Partner's vacation time. A Partner must notify the other Partners in writing in advance if participating in XXXXXXXXXX activities outside of the Partnership and obtain approval in advance of commencing such activities. If a Partner wishes to assume a public office, outside appointment, XXXXXXXXXX position or other activity which will require a time commitment outside the Partnership, the Partner must first disclose this fact to the Partnership and obtain a XXXXXXXXXX % approval of Partners in attendance at a meeting of Partners;

(l) each Partner is entitled to one vote on matters that come before meetings of the Partners;

(m) each Partner is responsible for paying his or her own membership fees with the XXXXXXXXXX . Partners must also have and maintain, at their own expense, a vehicle which is required to discharge his or her duties for the Partnership;

(n) associates may be hired to provide services to the Partnership upon a XXXXXXXXXX % approval of Partners in attendance at a meeting of Partners;

(o) new Partners may be approved for admission to the Partnership with a XXXXXXXXXX % approval of Partners in attendance at a meeting of Partners;

(p) meetings of Partners may be called by: (i) the Managing Partner or his/her designate or (ii) a majority of Partners;

(q) the Partnership will continue until it is terminated by the affirmative vote of XXXXXXXXXX % of the Partners in attendance at a meeting of Partners;

(r) the following events shall cause a Partner to have withdrawn from the Partnership:

(i) death;
(ii) "retirement" (which is mandatory in the year a Partner attains XXXXXXXXXX years of age but can be extended until age XXXXXXXXXX with the requisite approval of the Partners);
(iii) "voluntary withdrawal" (as described in Paragraph 5(s));
(iv) revocation or suspension by the XXXXXXXXXX ;
(v) bankruptcy;
(vi) physical or mental incapacity;
(vii) default under the principles of the Partnership Agreement which is not rectified within XXXXXXXXXX days after written notice from the Managing Partner; and
(viii) expulsion of a Partner;

(s) a Partner may voluntarily withdraw from the Partnership on XXXXXXXXXX days notice;

(t) a Partner may be expelled from the Partnership with the approval of XXXXXXXXXX % of the Partners in attendance at a meeting of Partners;

(u) during a period where a Partner is unable to practice (which consists exclusively of being prevented from providing XXXXXXXXXX services, excluding extended vacations, study leave, parental leave, or by the choice of the Partner) such Partner will receive only XXXXXXXXXX month's draw unless approved by a vote of XXXXXXXXXX % of the Partners at a meeting of Partners;

(v) each Partner has the responsibility to obtain his or her own disability income insurance;

(w) while a person is a Partner of the Partnership and for a XXXXXXXXXX year period thereafter, that person is not, other than for the Partnership, to practice XXXXXXXXXX within a XXXXXXXXXX radius of the Partnership's principal place of business without first obtaining the approval of XXXXXXXXXX % of remaining Partners in attendance at a meeting of Partners. Partners are also not to solicit employees or XXXXXXXXXX of the Partnership for work outside the Partnership during the same term without getting the requisite Partner approval; and

(x) upon the occurrence of a termination event for a Partner (as described in Paragraph 5(r)), that Partner shall be paid his or her share of the net income of the Partnership up to the termination date and the amount in his or her capital account with the Partnership. Repayment of the capital account is to be paid in no more than XXXXXXXXXX equal monthly payments without interest unless accelerated payment is approved by XXXXXXXXXX % of the Partners (excluding the retiring Partner) in person at a meeting of Partners;

6. XXXXXXXXXX

7. The Partnership's assets (the "Assets") consist of the "Non-85(2) Assets"(i.e., cash, accounts receivable and prepaid expenses), and the "85(2) Assets" (i.e., goodwill, inventory, equipment and one share of XXXXXXXXXX The Partnership's liabilities (the "Liabilities") consist of accounts payable, accrued liabilities and long-term debt (including loans from two Professional Corporations, which currently provide XXXXXXXXXX services to the Partnership on an independent contractor basis. Neither of these Professionals Corporations nor their shareholders are Partners of the Partnership, nor are they related to the Partnership or any of the Partners.)

8. All of the Partners are residents of Canada. None of the Partners is a related person to any other Partner.

PROPOSED TRANSACTIONS

9. Newco will be incorporated under the laws of the Province and will be authorized to issue an unlimited number of Class A preference shares and Class A common shares, all with equal voting rights and without nominal or par value. Upon incorporation, Newco will issue XXXXXXXXXX Class A preference shares to each of the Partners for nominal consideration. Newco will be a CCPC and a TCC.

10. Newco will make an application to the XXXXXXXXXX for a certificate of authorization to practice XXXXXXXXXX in the Province. Section XXXXXXXXXX permits a corporation to engage in the practice of XXXXXXXXXX upon having obtained a certificate of authorization from the XXXXXXXXXX .

11. After Newco obtains the required certificate of authorization from the XXXXXXXXXX , the Partnership will transfer all of the Assets to Newco at their fair market value. As consideration for the transfer of the Assets to Newco, Newco will:

(a) assume all of the Liabilities;

(b) issue to the Partnership XXXXXXXXXX Class A common shares having nominal paid-up capital (collectively, the "Newco Common Shares"); and

(c) issue XXXXXXXXXX separate demand, non-interest bearing promissory notes (the "Promissory Notes"), which in the aggregate will equal the cost amount of the 85(2) Assets, less the aggregate of (i) the amount of the Remaining Liabilities assumed by Newco (see Paragraph 14), and (ii) the nominal amount of paid-up capital attributable to the Newco Common Shares.

12. As sole consideration for the Partnership's transfer to Newco of the Non-85(2) Assets, Newco will assume a portion of the Liabilities equal in amount to the fair market value of those Non-85(2) Assets. The Partnership and Newco will file an election pursuant to section 22 of the Act in respect of the accounts receivable transferred to Newco.

13. With respect to the transfer of the 85(2) Assets from the Partnership to Newco, Newco and each of the Partners will jointly elect, pursuant to subsection 85(2) of the Act, in prescribed form and within the time permitted by subsection 85(6) of the Act, to have the provisions of paragraphs 85(1)(a) to (i) of the Act apply, with such modifications as the circumstances require. In this regard, the parties will agree that the "agreed amounts" for each particular Asset or group or class of Assets will be an amount that falls within the Elected Amount Parameters.

14. As consideration for the Partnership's transfer to Newco of the 85(2) Assets, Newco will (i) assume the "Remaining Liabilities" (ie., the portion of the Liabilities remaining after the transfer of the Non-85(2) Assets noted in Paragraph 12), (ii) issue the Promissory Notes to the Partnership, and (iii) issue the Newco Common Shares to the Partnership.

15. In order to facilitate the wind up of the Partnership (discussed in Paragraph 16), and in accordance with the administrative policy of the CRA set forth in Interpretation Bulletin IT-378R, one Newco Common Share referred to in Paragraph 11(b) will be issued in the name of each Partner instead of in the name of the Partnership. Notwithstanding the foregoing, the Partnership, and not the individual Partners themselves, will be the beneficial owners of the Newco Common Shares at the time that they are issued. In the same manner, one of the Promissory Notes issued by Newco referred to in Paragraph 11(c) shall be issued in the name of each Partner. The amount of such a Promissory Note will be equal to that Partners' pro rata share of the aggregate Promissory Notes, based on their respective interest in the Partnership. However, the Partnership, and not the Partners themselves, will be the beneficial owner of the Promissory Notes at the time they are issued.

16. On the day immediately following the transfer of the Assets to Newco, the Partnership will wind up its affairs in accordance with subsection 85(3) of the Act. Immediately prior to the winding up, the Partnership will have no property other than the consideration it received from Newco in respect of the disposition of the 85(2) Assets to Newco. Specifically, the only property in the Partnership will be the XXXXXXXXXX Newco Common Shares and the XXXXXXXXXX Promissory Notes.

17. In connection with the winding-up, each Partner will receive, in complete satisfaction of his or her interest in the Partnership, one Newco Common Share and a Promissory Note that will be equal in amount to their pro rata share of the aggregate Promissory Notes, based on their respective interest in the Partnership.

18. The shareholders of Newco will elect the directors of Newco. It is anticipated that each Partner will become a director of Newco. The directors will appoint the officers of Newco and it is expected that the President of Newco will be the individual who is currently the Managing Partner of the Partnership, XXXXXXXXXX .

19. The shareholders of Newco will enter into a shareholders agreement that will provide, among other things, for the following:

(a) the business of Newco will be the carrying on of the Practice;

(b) Newco will conduct the Practice by: (i) contracting with Contracting Companies as independent contractors; (ii) contracting with Contracting Professionals as independent contractors; and (iii) hiring Professional Employees;

(c) Newco's year end shall be XXXXXXXXXX .

(d) each shareholder of Newco will become a member of the board of directors of Newco;

(e) the officers of Newco will be appointed by the directors of Newco. Officers will be paid a salary for the services provided to Newco;

(f) Directors' meetings for Newco will be on a monthly basis and a quorum for most directors' meetings shall be a majority of the directors. However, notwithstanding the general quorum requirement, a certain number of key decisions will require the approval of XXXXXXXXXX of the directors;

(g) no shareholder shall be entitled to transfer his or her shares in Newco without first obtaining the approval of the board of directors of Newco;

(h) the shares owned by a shareholder in the capital stock of Newco will be purchased for cancellation if certain designated events occur, including: (i) the bankruptcy of a shareholder; (ii) the shares of a shareholder being seized by a secured creditor or pursuant to a court order; (iii) the licence of a shareholder to practice XXXXXXXXXX being cancelled or suspended; (iv) the death of a shareholder; (v) the board of directors of Newco voting to have the shares of a shareholder purchased for cancellation; (vi) a material breach of the shareholders agreement by a shareholder; and (vii) where a shareholder ceases to provide services to Newco either as a Contracting Professional or through a Contracting Company or, if a Professional Employee ceases to be an employee of Newco;

(i) any additional shares to be issued by Newco shall be purchased from treasury in the manner described in the shareholders agreement; and

(j) at the sole discretion of the directors of Newco, certain of the income of Newco will be paid as directors' fees or the after-tax profits of Newco will, from time to time, be distributed as dividends on the outstanding shares of Newco or a combination of dividends and directors' fees will be paid.

20. Newco will carry on the Practice through:

(a) Professional Employees;

(b) Contracting Professionals;

(c) Contracting Companies; and

(d) individuals employed by Newco to provide a variety of receptionist, filing, and other administrative and management services.

21. XXXXXXXXXX provides that XXXXXXXXXX may be employed by corporations holding a certificate of authorization to practice XXXXXXXXXX issued pursuant to the XXXXXXXXXX . Each Partner will have the choice of providing professional services to Newco by entering into an employment agreement with Newco, by entering into a services agreement as a Contracting Professional, or by using a Contracting Company to enter into a services agreement with Newco. Other Professionals may practice with Newco upon such terms as the respective Professional and Newco may agree.

22. Professionals who elect to enter into an employment relationship with Newco will enter into a written employment agreement which would, among other things, provide for the following:

(a) Newco will provide a detailed position description and control the duties that the Professional Employee will be required to perform;

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

(c) Newco shall pay all expenses related to the Professional Employee's service, including professional membership fees and dues, professional insurance, travel expenses (including motor vehicle, accommodations and meal expenses), professional development courses or seminars that Newco requires the Professional Employee to participate in and any entertainment expenses that Newco requires the Professional Employee to incur; and

(d) Newco shall supply all supplies, XXXXXXXXXX , books and equipment as required in the performance by the Professional Employee of his/her duties.

23. The Contracting Professionals who choose to enter into a contractual arrangement with Newco will be required to sign a written independent contractor services agreement. This services agreement will, among other things, provide for the following:

(a) the Contracting Professional will provide services to Newco on either a XXXXXXXXXX per diem or on a fee for service basis. The XXXXXXXXXX per diem and the fee for service fees will be negotiated with each Contracting Professional, and will be based on the fair market value of the services provided and may take into account the level of experience of the Contracting Professional and the level and type of services to be provided;

(b) the Contracting Professional shall provide to Newco certain professional services required by Newco in the Practice;

(c) there will be a minimum number of work days per year that the Contracting Professional agrees to work;

(d) the Contracting Professional will invoice Newco on a regular basis, the invoiced amounts to be based on estimated days to be worked and the preliminary agreed upon XXXXXXXXXX per diem rates or fee for service rates between the Contracting Professional and Newco. If the Contracting Professional provides more or less services than that originally estimated, the Contracting Professional and Newco will adjust accordingly periodically throughout the year. The parties will also agree that the XXXXXXXXXX per diem rates and the fee for service rates may be periodically adjusted within certain specified parameters based on Newco's cost of carrying on the Practice, but still reflecting fair market value for such services;

(e) Newco will provide the Contracting Professional with certain supplies, XXXXXXXXXX , 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 insurance;
(ii) continuing professional education;
(iii) transportation;
(iv) communication;
(v) maintaining the professional standards set by the XXXXXXXXXX from time to time;
(vi) expenditures on personal practice preferences of the Contracting Professional;
(vii) entertainment expenses connected to the business of the Contracting Professional;
(viii) the expense of professional development and courses; and
(ix) travel expenses, including motor vehicle, accommodation and meal expenses.

The fair market value of the items provided by Newco to the Contracting Professional will be taken into account in computing the fair market value fee paid to the Contracting Professional;

(f) so long as the Contracting Professional fully discharges his/her responsibilities under the services agreement with Newco, the Contracting Professional will not be restricted from providing professional services to other persons or otherwise prohibited from competing with Newco, with certain exceptions; and

(g) the Contracting Professional will indemnify Newco and its directors, officers and employees from any and all claims resulting from the services provided by the Contracting Professional to Newco under the services agreement.

24. Each of the Partners will elect to provide XXXXXXXXXX services to Newco through their own Contracting Company. Each Partner will incorporate a Contracting Company and, prior to entering into a Services Agreement with Newco (see Paragraph 27), will obtain a certificate of authorization from the XXXXXXXXXX .

25. Each Contracting Company will be controlled by the Partner that incorporated the Contracting Company, which Partner will be the legal and beneficial owner of all of the voting shares of the Contracting Company. Members of the Partner's Family may own non-voting shares of a Contracting Company and they may only be a shareholder of the Partner's Contracting Company. These shares will entitle the holder to discretionary dividends. The sole director of a Contracting Company will be the Partner that incorporated the Contracting Company. Such Partner will also be the President of the Contracting Company.

26. Each Partner will be an employee of his or her Contracting Company. Newco will require that a written employment contract be entered into which will provide the details of the employment relationship between the Partner and his or her Contracting Company.

27. Each Contracting Company will enter into a written independent contractor "Services Agreement" with Newco to provide XXXXXXXXXX services to Newco in consideration for a fair market value fee to be paid by Newco to the Contracting Company. Each Services Agreement will, among other things, provide for the following:

(a) the Contracting Company will provide services to Newco on either a XXXXXXXXXX per diem or on a fee for service basis. The XXXXXXXXXX per diem and the fee for service fees will be negotiated with each Contracting Company, and will be based on the fair market value of the services provided and may take into account the level of experience of the Contracting Company and the level and type of services to be provided. The XXXXXXXXXX per diem and the fee for services will not, in any way, be based on Newco's success in collecting the relevant billings generated by the Contracting Corporation on Newco's behalf;

(b) the Contracting Company shall provide to Newco certain professional services required by Newco in the Practice;

(c) 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 one-year terms, with any mutually agreed upon amendments, subject to the termination provisions;

(d) the requirements of the Contracting Company will be mutually agreed upon between Newco and the Contracting Company. There will be a minimum number of workdays per year that the Contracting Company agrees to work. Subject to the terms described in this letter, if the Contracting Company provides no services to Newco, the Contracting Company will not be paid;

(e) the Contracting Company will invoice Newco on a regular basis, the invoiced amounts to be based on estimated days to be worked and the preliminary agreed upon XXXXXXXXXX per diem rates or fee for service rates between the Contracting Company and Newco. If the Contracting Company provides more or less services than that originally estimated, the Contracting Company and Newco will adjust accordingly periodically throughout the year. The parties will also agree that the XXXXXXXXXX per diem rates and the fee for service rates may be periodically adjusted within certain specified parameters based on Newco's cost of carrying on the Practice. Any adjustments to the XXXXXXXXXX per diem rates or fee for service rates will still reflect fair market value and as noted in (a) above, will not be based on Newco's success in collecting the relevant billings;

(f) all payments from third parties in respect of services provided by a Contracting Company for the benefit of Newco and the Practice shall be made directly to Newco or remitted to Newco if received by the Contracting Company directly;

(g) Newco will provide the Contracting Company with certain supplies, XXXXXXXXXX , facilities and equipment required in the provision of professional services by the Contracting Company, but the Contracting Company shall be responsible for all expenses incurred by it in respect of the following:

(i) professional membership fees and insurance;
(ii) continuing professional education for its employees;
(iii) transportation;
(iv) communication;
(v) maintaining the professional standards set by the XXXXXXXXXX from time to time;
(vi) expenditures on personal practice preferences of the Contracting Company;
(vii) entertainment expenses connected to the business of the Contracting Company;
(viii) the expense of professional development and courses for its employees; and
(ix) travel expenses, including motor vehicle, accommodation and meal expenses for its principal employees.

The fair market value of the items provided by Newco to the Contracting Company will be taken into account in computing the fair market value fee paid to the Contracting Company;

(h) so long as the Contracting Company fully discharges its responsibilities under the services agreement with Newco, the Contracting Company will not be restricted from providing professional services to other persons or otherwise prohibited from competing with Newco;

(i) a Contracting Company may request that Newco suspend its Services Agreement for a specified period of time. This provision could possibly be used where the key employee of a Contracting Company is disabled or is not working after the birth of a child. In such a case Newco, in its sole discretion may either:

(i) consent to the suspension;
(ii) terminate the Services Agreement; or
(iii) consent to the suspension on the condition that the Contracting Company agrees in writing to provide future services to Newco for a specified period beyond the remaining term of the current Services Agreement in return for a fair market value negotiated fee;

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

(k) in the event of:

(i) the death of the principal employee of the Contracting Company; or
(ii) the bankruptcy of the Contracting Company or the principal employee of the Contracting Company,

Newco shall have the right to immediately terminate the Services Agreement; and

(l) the Contracting Company will indemnify Newco and its directors, officers and employees from any and all claims resulting from the services provided by the Contracting Company to Newco under the Services Agreement.

28. Each Contracting Professional and/or Contracting Company will be responsible for and bear the risk of loss of income as a result of disability and will make their own arrangements in this regard.

29. All persons legally or beneficially owning shares of a Contracting Company will be residents of Canada. A legal and beneficial shareholder of a Contracting Company will not be a legal or beneficial shareholder of another Contracting Company.

PURPOSE OF THE PROPOSED TRANSACTIONS

30. The purpose of the proposed transactions is to restructure the Practice of the Partnership without adverse tax consequences. The professional services of the Practice will continue to be provided through Newco, which will have the following advantages:

a) eliminating joint and several liability inherent in providing professional services through a partnership;

b) providing each Partner with the opportunity to participate in the Practice as a Contracting Professional or through a Contracting Company and, as such, have increased control over his or her individual level of participation in the Practice;

c) providing a structure through which an individual Partner may, if he or she so wishes, provide professional services external to the Practice;

d) providing each Partner with more options and control in arranging estate and succession planning; and

e) providing more flexibility and control to each Partner in determining the hours and days that he or she will work, in deciding on an individual basis the amount of effort and time that he or she wants to exert for the Practice, to see a direct result between effort and time put into the Practice and his or her earnings in the Contracting Company and to take time off for vacations, study and courses.

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. Subject to sections 18 and 67 of the Act, the fees payable by Newco to a Contracting Company for professional services as described in Paragraph 27, will be deductible by Newco in computing the profit or loss from its business pursuant to section 9 of the Act.

B. A Contracting Company that supplies services to Newco, as described in Paragraphs 24-27, will not be considered to be carrying on a personal services business. This is only so provided the Partner providing their services to Newco through their Contracting Company would not, if the particular Contracting Company did not exist, reasonably be regarded as an officer or employee of Newco in respect of those services.

C. Provided that Newco was not a member of a partnership in a particular taxation year and any Contracting Company was not a member of a partnership in that same year, the income of Newco and any Contracting Company for that taxation year will not be considered specified partnership income.

D. The proposed transactions, in and of themselves will not cause subsection 245(2) of the Act to apply 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 Partner who is providing his or her services to Newco through a Contracting Company would, but for the existence of that Contracting Company, be an employee of Newco, or an independent contractor who has entered into a contract for services with Newco, 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 Newco, and between the Contracting Company and the Partner. This review and determination is the responsibility of the Partner'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 25, 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 Partner 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 Partner 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.

OPINIONS

1. 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 Newco and each of the Contracting Companies. In general, 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 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. A particular determination of the reasons for such reorganization would be a question of fact. However, based on the facts and proposed transactions described herein, it is our view that the Partners' incorporation of the Partnership's business activities will not, in and of itself, cause subsection 256(2.1) of the Act to be applicable.

2. Consistent with paragraph 2 of Interpretation Bulletin IT-378R, Winding-up of a Partnership, it is our view that issuing the Newco Common Shares in the name of each Partner, instead of the Partnership, and issuing the Promissory Notes in the name of each Partner, instead of the Partnership, both as described in Paragraph 15, will not invalidate the application of subsection 85(2) of the Act nor the subsequent application of subsection 85(3) of the Act.

3. The application of subsection 256(5.1) of the Act is determined "...at any time where, at that time...". We are therefore unable to rule that this provision will never apply to Newco and each of the Contracting Companies. However, based solely on the facts and proposed transactions described herein, it is our view that, at the time Newco acquires the Practice, there is no indication that any Contracting Company will have sufficient direct or indirect influence over Newco to cause Newco to be considered to be controlled by a Contracting Company at that time, pursuant to subsection 256(5.1) of the Act.

In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on CRA.

Yours truly,

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