27 May 2009 External T.I. 2009-0315011E5 - Professional corporation's entitlement to the SBD

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: Tax implications where there is a restriction on a professional's right to compete and whether the CRA would provide an advance income tax ruling.

Position: Terms or arrangements that bring into question the independent status of the professional could deny or restrict access to the SBD. The CRA is unable to provide assurances in an advance ruling where such conditions exist.

Reasons: An evaluation could only be made on an after-the-fact basis.

XXXXXXXXXX 							2009-031501
								Rob Ferrari

May 27, 2009

Dear XXXXXXXXXX :

Re: Small Business Deduction

We are writing in reply to your correspondence of March 23, 2009, with respect to a partnership reorganization under which a professional's right to provide professional services are restricted. You have asked for our views as to the potential tax implications to a professional corporation's ("PC") eligibility to claim a small business deduction ("SBD") where a restriction is placed on the professional's right to compete.

Our Comments:

Professionals may provide their services through professional corporations, if provincial legislation and governing bodies permit this. In some cases, professionals that carry on business as partnerships may provide their professional services to the partnership as employees of their PC, which in turn are independent contractors to the partnership. The professionals, in the capacity as partners, would continue to provide non-professional services (i.e., promotional, administrative and other services) to the partnership. Under an alternative reorganization structure, the assets of the partnership may be acquired by a newly formed central corporation ("Newco"). Similarly, the professionals may provide their professional services as employees of the PC, which in turn are independent contractors to Newco.

The CRA accepts that professionals can provide services through a PC and may access the small business deduction ("SBD"). We would not challenge the transactions simply because that result is obtained, however, it is important that the parties genuinely create and maintain the structure that meets the requirements of the Income Tax Act.

A corporation that falls within the definition of a personal services business ("PSB") is not entitled to claim the SBD. A PC may be considered a PSB if the professional could reasonably be regarded as an officer or employee of the entity for whom the professional services are provided. The SBD may also be required to be shared among the PCs if they are carrying on business in partnership or if they are considered to be associated corporations under section 256. For example, two or more corporations are deemed to be associated under subsection 256(2.1) where it may reasonably be considered that one of the main reasons for the separate existence of those corporations in a taxation year is to reduce the amount of taxes that would otherwise be payable.

We would therefore look to whether the arrangement is conducted on an arm's length basis in which the fees and services would be of a kind and amount that would be agreed to between a partnership or Newco and a professional who is not a partner or an employee. In other words, consideration is given to whether the PCs and the professionals are providing services as independent contractors and the reasons that may exist for providing the services through the PCs.

The CRA is often requested to provide advanced income tax rulings with respect to such arrangements. Since the purpose of a ruling is to provide certainty of interpretation, the CRA would be unable to give assurance in an advance ruling where there are terms within the arrangements that bring into question the independent status of the professional. This is because where such conditions exist, that determination depends on the actual conduct of the parties and their future relationships, which can only be evaluated on an after-the-fact basis. The following are examples of some factors and conditions we would expect before providing an advance income tax ruling:

• There are no restrictions (oral or otherwise) on the PC's or the professional's right to compete with the partnership, Newco or other PCs.
• Fees are based on the value of professional services rendered. For example, there would be no inclusion of fringe benefits, vacation, sabbatical or large fixed fees (i.e., guaranteed amounts).
• Fees earned and paid to the particular PC are not based on the success of collecting the revenue billed to the clients of the partnership or Newco in respect of the professional services provided by the PC.
• The professional is responsible for his or her own administrative services, library, and supplies. If the partnership or Newco were to provide such items to the professional, it would expect to be recompensed.

I trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch