2009 Ruling 2009-0338281R3 - Partnership Reorg-Personal Service 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 2009-033828

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: XXXXXXXXXX [Partnership #XXXXXXXXXX ]
XXXXXXXXXX [the "Named Partner"]
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 electronic mail transmissions, letters, 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 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) finding new business and new clients for the Partnership; (ii) delegating work to other XXXXXXXXXX or Contracting Companies; (iii) maintaining a direct and material relationship with clients of the Partnership; (iv) mentoring XXXXXXXXXX ; (v) developing new areas of expertise; (vi) promoting, and contributing to the growth of the Practice; (vii) conducting management functions; (viii) educating Professionals and staff; (ix) enhancing the Partnership's profile and (x) XXXXXXXXXX ;

(c) "Associate" means a XXXXXXXXXX or Professional Corporation who is an associate of the Partnership and who provides Professional Services to XXXXXXXXXX or any of its Partners. None of the associates are Partners in the Partnership or are the subject of the Proposed Transactions;

(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) "Building" means the building located at XXXXXXXXXX , being the

location where XXXXXXXXXX carries on the Practice;

(f) "Building Owner" means an individual, corporation or trust which owns a co-

venture ownership interest in the Building;

(g) "Building Owners' Agreement" means the agreement entered into among the

Building Owners as may be amended from time to time which governs the terms of ownership for the Building;

(h) "Business Names Act" means XXXXXXXXXX

XXXXXXXXXX

(i) "Canadian-controlled private corporation" or "CCPC" has the meaning

assigned by subsection 125(7) of the Act;

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

(k) "Contracting Company" means each Professional Corporation that will be

incorporated as permitted under the laws of the Province (and as described in Paragraph 7) 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";

(l) "Corporations Act" means XXXXXXXXXX ;

(m) "Cost Sharer" means in respect of a particular period: (i) each person who was a

Partner at any time during such period, (ii) any Associate who is required in such period to contribute either directly or through a Non-Electing Partner to the expenses of XXXXXXXXXX and (iii) any person other than a Principal who in such period is engaged by a Contracting Company and who utilizes XXXXXXXXXX resources for which a fee is charged under a Supply Agreement to such Contracting Company;

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

(o) "Disability" means a physical or mental disability which prevents a Partner from performing his or her responsibilities to the Partnership for the applicable period of time specified under the terms of Partnership and "Disabled" has a corresponding meaning;

(p) "Distributable Professional Services Income" means in respect of any Non

Electing Partner for a particular fiscal year, an amount equal to XXXXXXXXXX for that Partner in such fiscal year;

(q) "Electing Partners" means those Partners who elect, and are approved by the

Management Committee, to provide Professional Services to the Partnership through a Contracting Company, as more particularly described in Paragraph 8;

(r) "Equity Partner" means a Partner of XXXXXXXXXX who:

(i) has the right to vote on any matter that comes before the Partnership;
(ii) owns an interest in the Plant; and
(iii) has the right to receive income and the obligation to pay Shared Expenses in accordance with the terms of the Partnership Agreement;

(s) "Expense Unit" means in respect of any particular period, the aggregate of the

following:

(i) in respect of each Full Cost Sharer, 1 and
(ii) in respect of each Partial Cost Sharer, an amount equal to the portion of the Shared Expenses determined by the Partnership to be payable by the Partial Cost Sharer in such period; and "Expense Units" means the aggregate of the foregoing for that particular period;

(t) "XXXXXXXXXX " and "Partnership" are used interchangeably and each means the partnership which currently carries on the Practice under XXXXXXXXXX

XXXXXXXXXX , a registered Limited Liability Partnership pursuant to the laws of the Province;

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

XXXXXXXXXX ;

(v) "Full Cost Sharer" means in respect of a particular period, a Cost Sharer who in accordance with the policies of XXXXXXXXXX is responsible for a Full Share of Shared Expenses for such particular period;

(w) "Full Share of Shared Expenses" means:

Shared Expenses for a particular period
Number of Expense Units in such period

(x) XXXXXXXXXX

(y) "XXXXXXXXXX " means an individual who holds a valid certificate from the XXXXXXXXXX to practice XXXXXXXXXX in the Province;

(z) XXXXXXXXXX

(aa) "Limited Liability Partnership" means a partnership formed pursuant to the

Partnership Act and registered under the Business Names Act as a limited liability partnership;

(bb) "Management Committee" shall mean the management committee of the

Partnership, as more particularly described in subparagraph 4(i);

(cc) "Named Partner" means XXXXXXXXXX

XXXXXXXXXX . 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;

(dd) "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;

(ee) "Non Equity Partner" means a Partner of XXXXXXXXXX with the same rights and obligations as an Equity Partner, except that a Non Equity Partner (i) does not have the right to vote on any matters that come before the Partnership, and (ii) does not own an interest in the Plant;

(ff) "Non Shared Expenses" means those expenses of a Contracting Company (or in

the case of a Non Electing Partner, those expenses of a Non Electing Partner) incurred in carrying on its (or his) XXXXXXXXXX practice which are not Shared Expenses and include secretarial expense, professional insurance, memberships and certain advertising and promotional expenses;

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

(hh) "Partial Cost Sharer" means a Cost Sharer who pursuant to the policies

determined by the Partners is entitled to a reduction in the payment of Shared Expenses for a particular period;

(ii) "Partner" means a Professional or a Professional Corporation that is either an

Equity Partner or a Non Equity Partner of the Partnership and collectively they are referred to as the "Partners";

(jj) "Partnership Act" means XXXXXXXXXX ;

(kk) "Partnership Agreement" means the Partnership Agreement to be entered into

among the Partners as part of the proposed transactions;

(ll) "personal services business" has the meaning assigned by subsection 125(7) of the

Act;

(mm) "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;

(nn) "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;

(oo) "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 ;

(pp) "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;

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

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

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

(tt) "Relationship Partner" in respect of a client means a Partner who has the primary relationship with that client;

(uu) "Services Agreement" means the Services Agreement to be entered into between the Partnership and each Contracting Company, as more particularly described in Paragraph 11;

(vv) "Shared Expenses" means in a particular period the following expenses of XXXXXXXXXX XXXXXXXXXX paid in such period (XXXXXXXXXX ): (i) staff employed by XXXXXXXXXX (which for greater certainty includes bookkeepers, receptionists, office managers, and XXXXXXXXXX but does not include secretarial staff), (ii) rental expense, (iii) business taxes, (iv) office equipment (purchased and/or leased), (v) IT support costs, (vi) website and phone book advertising, (vii) stationary and supplies, (viii) other expenses paid in such period that were approved by the Partners and (ix) other expenses paid in such period that have been approved by XXXXXXXXXX 's Management Committee, provided such expenses do not exceed $XXXXXXXXXX ;

(ww) "Signed Resolution" means a written resolution signed by a majority of the

Partners;

(xx) "specified partnership income" has the meaning assigned by subsection 125(7) of

the Act;

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

(zz) "Supply Agreement" means a supplies agreement to be entered into between XXXXXXXXXX and each Contracting Company in the form negotiated with each Contracting Company from time to time and as described in Paragraph 12 herein;

(aa) "taxable Canadian corporation" or "TCC" has the meaning assigned by

subsection 89(1) of the Act;

FACTS

1. The Partnership can trace its roots back to XXXXXXXXXX . On XXXXXXXXXX became a Limited Liability Partnership. On the same date XXXXXXXXXX changed its name to XXXXXXXXXX . The Partnership currently carries on the Practice in the Province as a Limited Liability Partnership. The Partnership currently has XXXXXXXXXX Partners (XXXXXXXXXX Equity Partners of which XXXXXXXXXX are individual XXXXXXXXXX and XXXXXXXXXX are Professional Corporations and XXXXXXXXXX Non Equity Partner). 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. The Partners are as listed in Appendix 'A', attached to this letter.

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 Associates who are not Partners but who provide XXXXXXXXXX services to the Partnership. This ruling is not applicable to any Associates.

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 was previously governed by terms agreed to in a written

partnership agreement dated XXXXXXXXXX , last amended XXXXXXXXXX . However, that agreement is outdated and was superseded by certain terms that were previously agreed to orally by the Partners [Note: The key terms of this oral agreement will, with some changes, form part of the written Partnership Agreement contemplated below in the proposed transactions - see Paragraphs 6 - 11]:

(a) Partners may be admitted to XXXXXXXXXX as either Equity Partners or Non Equity Partners;

(b) each Equity Partner is entitled to one vote on all matters that come before a meeting of Partners. Non Equity Partners are not entitled to vote on matters that come before a meeting of Partners;

(c) upon being admitted as an Equity Partner to the Partnership, each Equity

Partner may elect to acquire an interest, or designate a nominee to acquire an interest, in the Building. The Building is owned by the Building Owners as a joint venture and the ownership and operation of the Building is governed by the Building Owners Agreement. The Partnership has entered into a rental agreement with the Building Owners pursuant to which the Building Owners rent the Building to the Partnership;

(d) income is allocated and distributed to each Partner based on XXXXXXXXXX

XXXXXXXXXX of a Partner. Each Partner is credited an amount equal to XXXXXXXXXX % of his XXXXXXXXXX for the XXXXXXXXXX services performed by such Partner. Further, an amount equal to XXXXXXXXXX % of the XXXXXXXXXX is credited to the Partner who is the Relationship Partner with respect to such client [See Paragraphs 10 and 11 below for changes that will be made to this provision];

(e) for each period determined from time to time by the Management Committee

(currently being monthly), each Cost Sharer shall be responsible to pay that portion of Shared Expenses based on his or its Expense Unit. Each Partner shall also be responsible to pay its or his own Non Shared Expenses;

(f) in the event a Partner (or the Principal of a Professional Corporation that is a Partner) dies, the estate of the deceased Partner (or the Professional Corporation) is liable for a share of the Shared Expenses up to and including the date of death;

(g) Partners are responsible to make their own arrangements for disability
insurance;

(h) Partner meetings occur when called by the Management Committee. Quorum

for a meeting of Partners requires Equity Partners present in person or represented by proxy being more than XXXXXXXXXX % of the Equity Partners in number. Unless otherwise determined, resolutions passed at meetings are to be determined by an ordinary majority. Alternatively, resolutions of the Partners may be passed by a Signed Resolution;

(i) management of the affairs of the Partnership is carried out by the Management Committee. The Management Committee is currently comprised of XXXXXXXXXX Partners, one of whom is selected to be the Chair. The members of the Management Committee are elected or appointed by the Partners from time to time. The Management Committee is responsible to ensure competent management of the business and affairs of the Partnership and for the overall operations of the Partnership;

(j) 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 and cost allocation to Partners;
(v) changes in the financing structure of the Partnership; and
(vi) the selection of the members of the Management Committee;

(k) 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;

5. All of the Partners are residents of Canada for the purposes of the Act. No Partner

is a "related person" to any other Partner.

PROPOSED TRANSACTIONS

6. A Partnership Agreement will be entered into which will set out in writing the terms summarized in Paragraph 4, as amended by the terms stipulated in this Paragraph and in Paragraphs 8 - 11. Particularly, the Partnership Agreement will, with the approval of the Management Committee, 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. The Partnership Agreement will differentiate between two functions that each Partner performs: Professional Services and Administrative Responsibilities.

7. 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 13). 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.

8. Each Partner shall have the right to elect, by notice to the Partnership, and with the approval of the Management Committee, 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).

9. Upon receipt of the notice, and with the approval of the Management Committee, 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 11. The Partnership Agreement will 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 prohibit the transfer, conveyance or issuance of an interest in the Partnership to any Contracting Company.

10.(a) The Partnership Agreement will provide that the calculation of an Electing Partner's share of Partnership profits for a year will be solely dependent on the Administrative Responsibilities conducted for the Partnership, net of their portion of the Shared Expenses. More specifically, the calculation of an 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, or the Principal of the Electing Partner, as the case may be, in his or her role as an employee of a Contracting Company.

(b) A Non Electing Partner's share of profits of the Partnership for a particular year will be based on

(i) the Partner's Administrative Responsibilities conducted for the
Partnership for the year, net of their portion of the Shared Expenses for that year, and
(ii) their Distributable Professional Services Income in respect of the

amount of Professional Services provided to the Partnership by the Non Electing Partner for the year.

Provided there is net Partnership income to be allocated to Partners in respect of Administrative Services for a particular year,

(i) no Partner shall be allocated a negative amount, and
(ii) XXXXXXXXXX

11. 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:

(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 ("Fees") directly to the Contracting Company. The Fees will be based on the fair market value of the Professional Services provided by the Contracting Company to the Partnership. For greater certainty, the amount of the Fees will not be based in any way on the success of XXXXXXXXXX in respect of the Professional Services provided by the particular Contracting Company to the Partnership;

(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 for Professional Services provided by each Contracting Company 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 Partnership will pay the Contracting Company a monthly payment on

account of the Fees payable. At the end of the Fiscal Year the parties will conduct a final reconciliation;

(e) the Contracting Company will invoice the Partnership on a monthly basis 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 any amounts are received by a Contracting Company, they will be remitted to the Partnership;

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

(i) secretarial and administrative support;
(ii) professional membership fees and insurance;
(iii) transportation;
(iv) communication;
(v) maintaining the professional standards set by the XXXXXXXXXX and the Partnership (to the extent necessary for the Contracting Company to fulfill 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;

(h) the Services Agreement with a particular Contracting Company shall be
terminated upon the Principal of the Contracting Company (or his Professional Corporation) ceasing to be a Partner of XXXXXXXXXX . The Contracting Company may also terminate the Services Agreement on XXXXXXXXXX days written notice;

(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;

(j) as long as a Contracting Company fully discharges its responsibilities under the Services Agreement by providing the agreed upon level of Professional Services to the Partnership, the Contracting Company will not be restricted from providing services to other persons or otherwise prohibited from competing with the Partnership. Consequential amendments to the Partnership Agreement will be made so that any Electing Partner, who provides Professional Services through a Contracting Company, and where the Electing Partner is a Professional Corporation, the respective Principal, is not restricted from competing with the Partnership in respect of those Professional Services. For greater certainty, there will not be any terms in the Partnership Agreement, or any other agreement (oral or otherwise) that would prohibit any Contracting Company, Electing Partner, and where the Electing Partner is a Professional Corporation, the respective Principal, from competing with the Partnership in respect of the provision of Professional Services, as noted above.

12. The Contracting Company may also choose to enter into a supplies agreement (the "Supplies Agreement") with the Partnership whereby the Contracting Company can rent the use of administrative support services and other resources from the Partnership for fair market value rent. The Supplies Agreement will be automatically renewed on an annual basis. However, the Partnership may terminate the Supplies Agreement at any time on XXXXXXXXXX days notice to the Contracting Company and the Contracting Company may terminate the Supplies Agreement at any time on XXXXXXXXXX months notice to the Partnership.

13. 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.

14. All of the voting shares of each Contracting Company will be legally and

beneficially owned by the Principal that incorporated the Contracting Company. Non voting shares of Contracting Companies may be owned by a Principal's spouse and/or children. All shareholders of any Contracting Company will be Canadian residents.

15. The sole director and president of each Contracting Company will be the Principal that incorporated the Contracting Company.

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

17. Each Principal will be an employee of his or her Contracting Company and will provide Professional Services for the benefit of their 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 and other remuneration 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.

18. The Named Partner will elect, and will be approved by the Management

Committee, to provide its Professional Services to the Partnership through a Contracting Company (the "Particular Contracting Company").

19. 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 Subparagraph 11(a) above.

20. 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.

21. Consistent with Paragraph 10(a), the allocation of Partnership profits to the Named Partner will be solely based on the Administrative Responsibilities performed by the Named Partner, net of its portion of the Shared Expenses. It will not depend on the Professional Services provided by the Particular Contracting Company, or time spent by the Principal of the Named Partner on professional activities in his role as an employee of the Particular Contracting Company.

PURPOSE OF PROPOSED TRANSACTIONS

22. 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; and

(ii) 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 purposes 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 of the relevant circumstances, the Named Partner's share of the Partnership income will not be altered pursuant to subsection 103(1) of the Act solely as a result of the Named Partner choosing, pursuant to the proposed transactions, to provide all of its Professional Services to the Partnership through the Particular Contracting Company in consideration for the Fees.

C. The execution and implementation of the proposed transactions described above, in and of themselves, will not create a non-arm's length relationship between the Named Partner and the other 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 Particular Contracting Company pursuant to a Services Agreement as described in Subparagraphs 11(a) and 11(d), 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 proposed transactions 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 received by the Particular Contracting Company under a Services Agreements to be taxed as income in the hands of the Named Partner.

F. The supply of Professional Services by the Particular Contracting Company to the Partnership as described in the proposed transactions will not be considered the carrying on of a personal services business. This is only so provided the Principal of the Named Partner that provides Professional Services to the Partnership through the Particular Contracting Company would not, if that Contracting Company did not exist, reasonably be regarded as an officer or employee of the Partnership in respect of those services.

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 11(a) and (d), above, will not be specified partnership income.

H. Implementation of the proposed transactions, will not, in and of themselves, result in the application of the provisions of subsection 245(2) of the Act to redetermine the tax consequences confirmed in the rulings given above.

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.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted any of the tax consequences relating to the facts and proposed transactions described above except as expressly stated in the rulings. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to or accepted the fair market value or reasonableness of any amounts, including the Fees.

ADDITIONAL COMMENTS

Whether or not the Principal of the Named Partner would, if the Particular Contracting Company did not exist, 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 Particular Contracting Company, the Partnership, the Named Partner and the Principal of the Named Partner. This review and determination is the responsibility of the particular 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 14, 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 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.

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 Particular Contracting Company. 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 Particular Contracting Company 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 Particular Contracting Company.

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

APPENDIX 'A'

XXXXXXXXXX