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 the income earned by a professional's corporation from providing professional services to a partnership in which the professional is a Partner would qualify for the small business deduction and would not be restricted under the rules for specified partnership income and personal services business.
Reasons: The facts and proposed transactions conform to the standards set out in similar rulings.
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the “Partnership”) and the
“Partners,” as listed in Appendix A.
We are writing in response to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the Partnership and the Partners. We also acknowledge the information provided in various emails and telephone conversations (XXXXXXXXXX ).
To the best of your knowledge and that of the Partnership and the Partners (collectively the “Taxpayers”), none of the issues involved in the ruling request is:
i. in an earlier return of any of the Taxpayers or a related person;
ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by any of the Taxpayers or a related person;
iii. under objection by any of the Taxpayers or a related person;
iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
v. the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
The following definitions have been used in this letter:
(a) “Agreement” refers to any AFA or AFP Agreement;
(b) “AFA Agreement” or “AFA” refers to any agreement entered into by the Ministry, the Governance Organization and the Association, pursuant to which the Ministry provides funding for Professional Services and related activities;
(c) “AFA Funds” refers to any funds received by the Partners directly or indirectly, from the Government of XXXXXXXXXX pursuant to the provisions of the AFA Agreement;
(d) “AFP Agreement” or “AFP” refers to any the agreement entered into by the Ministry, the Governance Organization, and the Associations, pursuant to which the Ministry provides funding for various Professional Services, Non-Professional Services and related activities;
(e) “AFP Funds” refers to any funds received by the Partners, directly or indirectly, from the Province pursuant to the provisions of the AFP Agreement;
(f) “Associations” refers to “XXXXXXXXXX ” and “XXXXXXXXXX ”;
(g) “CCPC” refers to a “Canadian-controlled private corporation” as defined under subsection 125(7) of the Act;
(h) “XXXXXXXXXX AFA” refers to the AFA Agreement relating to the provision of XXXXXXXXXX Professional Services XXXXXXXXXX;
(i) XXXXXXXXXX ;
(j) “College” refers to the College of Physicians and Surgeons of the Province;
(k) “Contract” refers to the written sub-contracting agreement which will be used to set out the terms and conditions by which a ProCorp will provide Professional Services to the Partnership;
(l) “CRA” refers to the Canada Revenue Agency;
(m) “Department” refers to the XXXXXXXXXX of the Hospital;
(n) “Electing Partner” refers to a Partner who elects to provide his or her Professional Services through a ProCorp;
(o) “Fees” refer to the fair market value fee to be charged under the Contract by a ProCorp to the Partnership;
(p) “Funds” refer to any funds received by the Partnership, directly or indirectly, from the Province pursuant to the provisions of an Agreement;
(q) “General AFA” refers to the AFA Agreement relating to the provision of XXXXXXXXXX Professional Services XXXXXXXXXX ;
(r) XXXXXXXXXX ;
(s) “Governance Organization” refers to the XXXXXXXXXX ;
(t) “Hospital” refers to the XXXXXXXXXX ;
(u) “Income” refers to the Partnership’s income or loss for a particular Taxation Year as computed under subsection 96(1) of the Act;
(v) “Member” refers to an individual physician who is a member of one of the Associations and who will become a Partner;
(w) “Ministry” refers to the XXXXXXXXXX of the Province;
(x) “Non-Electing Partner” refers to a Partner who does not elect to provide Professional Services through a ProCorp;
(y) “Non-Professional Services” refer to any services provided by Partners on behalf of the Partnership, other than Professional Services, including the promotion of the Practice;
(z) “Partner” refers to a partner of the Partnership as listed in Appendix A;
(aa) “Partnership Agreement” refers to the partnership agreement by which the Partnership will be formed and governed;
(bb) “Physician” refers to a member of the College who holds a certificate of registration to practice medicine as issued by the College;
(cc) “Practice” encompasses both Professional Services and Non-Professional Services;
(dd) “ProCorp” refers to any of the corporations to be formed by an Electing Partner and through which an Electing Partner will provide Professional Services as an employee of that corporation;
(ee) “Professional Services” refers to patient care services and all direct and indirect services ancillary to the provision of patient care services as provided by the Partners through the Partnership;
(ff) “Province” means the Province of XXXXXXXXXX ;
(gg) “Provincial Medical Association” refers to the XXXXXXXXXX;
(hh) “Provincial Funds” refer to any funds received by the Partnership, directly or indirectly, from the Province pursuant to an Agreement;
(ii) “Public Plan” refers to the XXXXXXXXXX Health Insurance Plan XXXXXXXXXX;
(jj) “Related Persons” has the meaning assigned by subsection 251(2) of the Act;
(kk) “TCC” refers to a “taxable Canadian corporation” as defined under subsection 89(1) of the Act;
(ll) “Taxation Year” refers to the Partnership’s taxation year for income tax purposes which is defined in paragraph 96(1)(b) of the Act as the Partnership’s fiscal period; and
(mm) “University” refers to the XXXXXXXXXX .
Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:
1. The Members currently carry on Practices and provide both Professional Services and Non-Professional Services through the Associations. Each of the Associations is comprised of the Members who are participating in the AFA Agreement applicable to the campus at which the Member is based. The Members file their income tax returns with the XXXXXXXXXX Tax Centre and deal with the XXXXXXXXXX Tax Services Office.
2. All Members are resident in Canada for the purposes of the Act. None of the Members are Related Persons, with the exception of Members who are spouses or common-law partners of each other. Each Member is a member of the College and is authorized to practice medicine in the Province.
3. None of the Members are employees of the Associations, the Governance Organization or the Hospital.
4. In general terms, the Hospital acts as a “host” for the Members and provides physical space, clerical and administrative staff, medical residents and equipment to allow the Members to provide their services. In addition, the Associations share the costs of some administrative staff.
5. The purpose of the Associations is to oversee and coordinate the activities of the Members and fulfill the role of a practice plan under the AFP.
6. The Associations are managed by the Members, who meet XXXXXXXXXX times annually and vote on the various matters affecting the Members. The activities of the Members can be classified into four general categories: clinical services, research, teaching and administrative duties.
7. In general, the AFA Agreement is an alternative to the simple fee-for-service model that has traditionally been used by the Province to compensate Physicians. In general, it provides for fixed lump-sum monthly payments to partially compensate the Members for patient care services rendered by them and insured under the Public Plan in addition to the normal fee-for-service model.
8. The AFP Agreement provides funding to support teaching, research and academic activities of the Members, to support the administrative activities of the Governance Organization, to support the development of innovative practices in health care delivery and to recognize the recruitment efforts of the Associations.
9. The Members also bill the Public Plan on a fee-for-service basis. The Associations may also receive additional monies that are not covered by the Agreement; for example, fees for Professional Services provided for out-of-province or private pay patients.
10. The Governance Organization was established for the purposes of representing the interests of its members and ensuring the proper and efficient provision of their respective and mutual obligations under the Agreement. Its responsibilities include:
(a) ensuring that the Associations provide the level of patient care services required under the Agreement;
(b) receiving, managing, allocating and distributing to the Associations the funding received under the Agreement; and
(c) reporting on the allocation and distribution of funding under the Agreement.
11. All of the Members have academic appointments at the University. These appointments relate to the Hospital's status as a “XXXXXXXXXX”, which results in increased funding from the Ministry. The vast majority of the Members do not receive compensation from the University.
12. A few Members receive modest compensation from the University which relates only to the Non-Professional Services provided by the Member. Many of those Members are treated as employees by the University and are paid directly by the University for their services.
13. After deducting some administration costs, the costs of consultants and amounts provided to the Department in support of academic activities, the balance allocated and distributed to the Members is in accordance with practices, policies and guidelines established by the Members.
14. In anticipation of implementing the proposed transactions, some of the Members have incorporated ProCorps which have obtained Certificates of Authorization from the College as described in paragraph 18(a). In each case, the Member is the only voting shareholder, director and officer of these ProCorps, while non-voting shares may have been issued to the Member’s family, where family is defined as those individuals connected by blood relationship, marriage, common-law partnership or adoption, as those terms are defined in subsection 251(6) of the Act. Other than the incorporation of such ProCorps, no other proposed transactions have been undertaken by the Taxpayers and the ProCorps have otherwise been inactive.
15. The Members will enter into the Partnership Agreement in order to establish a new general partnership under the laws of the Province. The Taxation Year of the Partnership will be XXXXXXXXXX. There will be no property transferred from the Members’ Practices to the Partnership. All Members will become Partners.
16. The Partnership Agreement will provide, among other things:
(a) It will clearly differentiate between Professional Services and Non-Professional Services.
(b) Partners will be allowed to elect to provide Professional Services through a Partner’s ProCorp. If the Partner so elects, the Partner will no longer be permitted to provide any Professional Services to the Partnership in his or her capacity as a Partner.
(c) The transfer, conveyance or issuance of an interest in the Partnership to a ProCorp will be prohibited. Only individuals who are Physicians will be permitted to be partners of the Partnership.
(d) A provision will be added to prohibit the performance of an Electing Partner’s Non-Professional Services by his or her ProCorp and further requiring that all Partners devote and spend the time and energy required to complete their portion of the Non-Professional Services.
(e) The formula for the allocation of Partnership Income for a Taxation Year will provide that an Electing Partner’s allocation of Partnership Income for a particular Taxation Year will be dependent on the Partner’s capital contribution and factors connected to the Non-Professional Services carried out by the Electing Partner on behalf of the Partnership. For greater certainty, the Partnership Agreement will make it clear that the calculation of an Electing Partner’s share of Income for a Taxation Year will not take into account any Professional Services provided by his or her Partner’s ProCorp, nor will it take into account any time spent by the Electing Partner performing Professional Services as an employee of the Partner’s ProCorp.
(f) A provision will be added to ensure that all Non-Electing Partners will continue to provide their Professional Services directly to the Partnership. Further, the Partnership Agreement will clarify that a Non-Electing Partner will be allocated a greater share of Income to take into account that he or she has provided both Professional and Non-Professional Services.
(g) A provision will be added to provide that as long as a ProCorp fully discharges its responsibilities under a Contract, a ProCorp will not be restricted from providing Professional Services to other persons or otherwise prohibited from competing with the Partnership. The Partnership Agreement will clearly specify that Electing Partners are not restricted from competing with the Partnership in respect of Professional Services.
(h) For greater certainty, there will not be any terms in the Partnership Agreement, or any other agreement (oral or otherwise), that would prohibit ProCorps or the Electing Partners from competing with the Partnership in respect of the provision of Professional Services.
17. The Partnership will be governed by the Partners with certain tasks delegated to an Executive Committee and, as required under the AFP Agreement, a Finance Management Committee will be created to manage the AFP Funds received from the Governance Organization pursuant to the AFP Agreement.
18. Each ProCorp will meet all of the following requirements:
(a) It will be incorporated pursuant to the laws of the Province and will obtain a Certificate of Authorization from the College that will authorize it to practice medicine in the Province.
(b) It will qualify as a TCC and a CCPC.
(c) It will be controlled by an Electing Partner, who will be the legal and beneficial owner of all of the voting shares of the particular ProCorp. Non-voting shares may be held by an Electing Partner or his or her family, where family is defined as those individuals connected by blood relationship, marriage, common-law partnership or adoption, as those terms are defined in subsection 251(6) of the Act. All shareholders legally or beneficially owning voting and non-voting shares of the ProCorp will be residents of Canada.
(d) An Electing Partner will be the sole director of his or her ProCorp. He or she will also be an employee of ProCorp pursuant to a written employment contract and will be entitled to receive a salary in return for providing Professional Services as an employee of his or her ProCorp.
(e) An Electing Partner cannot be an employee, officer, director or shareholder, legal or beneficial, of more than one ProCorp.
(f) No two ProCorps will be Related Persons with the exception of ProCorps incorporated by Partners who are spouses or common-law partners.
(g) A ProCorp cannot be a partner in the Partnership.
19. Upon receipt of a written notice from an Electing Partner, the Partnership will enter into a Contract with the particular Electing Partner’s ProCorp containing the following terms:
(a) The ProCorp will provide Professional Services on behalf of the Partnership in return for Fees. The amount of the Fees will be based on the fair market value of the Professional Services provided by the Partner’s ProCorp to the Partnership. The Fees will relate only to the level of work performed by Partner’s ProCorp and will not take into account the success of collected billings in respect of that work.
(b) The Contract will be for an indefinite term but either party may terminate the Contract at any time upon notice to the other within a pre-established time period. The Contract will also contain terms for automatic termination such as where the ProCorp is dissolved or ceases to hold a valid certificate from the College or where the controlling shareholder of the ProCorp ceases to be a Partner.
(c) All payments received by the Partnership from third parties in respect of Professional Services provided by the ProCorp under the Contract will be for the benefit of the Partnership, and if a Partner’s ProCorp receives any such amounts, they will be remitted to the Partnership.
(d) Provided that a ProCorp fully discharges its responsibilities under the Contract, a ProCorp will not be restricted from providing Professional Services to other persons or otherwise be prohibited from competing with the Partnership.
(e) The ProCorps will be responsible for providing all equipment, tools, and instruments used in the performance of the Professional Services at their expense. Pursuant to the Contract and in consideration for a fair market value fee, the Partnership will provide the ProCorps with certain facilities, equipment, supplies and personnel that are required in the provision of Professional Services.
(f) The ProCorps will also be responsible for all expenses required to maintain the professional standards required by the Partnership and all fees and expenses necessary to perform the Professional Services, including, without limitation:
(i) professional membership fees;
(ii) professional malpractice and other insurance premiums;
(iii) continuing education and training expenses;
(iv) transportation expenses;
(v) communication expenses;
(vi) business entertainment expenses connected to the business of the ProCorp; and
(vii) travel expenses, including car, accommodation and meal expenses.
(g) In the event that an Electing Partner suffers a physical or mental disability such that a ProCorp is unable to provide the services required under the term of the Contract, the Partnership will have the right to terminate the Contract.
(h) In the event of the death of an Electing Partner or the bankruptcy of the ProCorp or its Electing Partner, the Partnership will have the right to immediately terminate the Contract.
20. The ProCorps’ relationship to the Partnership is that of an independent contractor, and nothing in the Contract should be construed as:
(a) allowing either party the authority to assume or create any obligation whatsoever, express or implied, in the name of the other or to bind the other in any manner whatsoever;
(b) giving either party the power to direct and control the day-to-day activities of the other party or any of their respective employees or agents, or,
(c) constituting the parties as partners, joint venturers, co-owners or otherwise as participants in a joint or common undertaking.
21. Within six months of the date of this Ruling, the Electing Partners will elect under the Partnership Agreement to provide Professional Services through their respective ProCorps. Immediately thereafter, the ProCorps will enter into Contracts with the Partnership for the purpose of providing such services.
Purpose of the Proposed Transactions
The primary objective of the proposed transactions is to simplify the current operating structure of the Department and to allow Members to render Professional Services through professional corporations in accordance with XXXXXXXXXX Business Corporation Act while at the same time ensuring minimal disruption to the arrangements between the Members and the Associations, the Provincial Medical Association and other third-parties, including the Hospital, the University, the Public Plan and the Ministry. Other purposes include:
(a) to provide Partners with an increased level of control over their participation in the Practice through individual management of personal practice references;
(b) to permit Partners to have more control over expenditures reflecting personal practice preferences where such expenditures may not be in the interest of all Partners;
(c) to provide Partners with more control over their estate and financial planning; and
(d) to enhance the Partnership's ability to retain Partners.
(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,
we rule as follows:
A. Provided that a Partner would not, if his or her ProCorp did not exist, reasonably be regarded as an officer or employee of the Partnership in respect of the provision of Professional Services, the Partner’s ProCorp will not be considered to be carrying on a personal services business as defined in subsection 125(7) of the Act.
B. Provided that a ProCorp was not a member of any partnership in the relevant year in respect of the provision of Professional Services to the Partnership, the Fees earned by the particular ProCorp will not be specified partnership income as defined in subsection 125(7) of the Act.
C. Subject to sections 18 and 67 of the Act, the Fees payable by the Partnership to a ProCorp will be deductible by the Partnership in the determination of Income pursuant to subsection 96(1) of the Act.
D. The undertaking of the proposed transactions above, and in particular the payment of the Fees, 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 a Partner’s ProCorp under the Contract to be taxed as income in the hands of the particular Partner.
E. Provided that the amount of Income allocated to each Electing Partner is reasonable, having regard to all the relevant circumstances, the sharing of the Income between the Partners will not be subject to adjustment pursuant to subsection 103(1) of the Act solely as a result of a Partner being allowed to incorporate a ProCorp pursuant to the Partnership Agreement and to provide all of his or her Professional Services to the Partnership through that ProCorp for Fees.
F. 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 of the Partners.
G. The execution and implementation of the proposed transactions described above, will not, in and of themselves, create a non-arm’s length relationship between any Partner and any other Partner with respect to sharing Income for income tax purposes.
H. Implementation of the proposed transactions as described above will not, in and by 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 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 addition, 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. Finally, without restricting the generality of the foregoing restrictions, it should also be noted that nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to or accepted the income tax consequences, if any, related to the formation of the Partnership, including the issues of whether the Partnership will be a partnership at law and the validity of the statement that no property will be transferred from the Members’ existing Practices to the Partnership on the latter’s formation such that there will be no income tax consequences as a result of the transfer of property by the Members to the Partnership.
Whether or not a particular Partner would, if his or her ProCorp did not exist, be an employee of the Partnership or an independent contractor who has entered into a contract of services with the Partnership is a question of fact that can only be determined after a review of the actual agreements entered into between the particular ProCorp and the Partnership and between the particular ProCorp and the particular 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 possible ownership of any shares of any ProCorp 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 ProCorp to a family member of the Partner. Also, section 120.4 of the Act may apply with respect to taxable dividends or trust income in respect of taxable dividends from a ProCorp received in a taxation year by a family member of the Partner who has not attained the age of 17 years before that year.
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 a ProCorp. 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 a ProCorp by a Partner 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 ProCorps.
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.
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Name of Partner SIN
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