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 reorganization of a partnership so that professional services would be provided by corporations wholly owned by the partners would result in the application of the restrictions for "personal services business" or "specified partnership business" so that the corporations would not be entitled to the full small business deduction on their contract income.
Reasons: The proposed reorganization complies with all of our restrictions for such reorganizations.
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (“the Partnership”) and the “Partners,” as listed in Appendix B.
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) “Association” means the XXXXXXXXXX ;
(b) “BCA” means the XXXXXXXXXX Business Corporations Act;
(c) “CCPC” refers to a “Canadian-controlled private corporation” as defined under subsection 125(7) of the Act;
(d) “Clinic” refers to XXXXXXXXXX or XXXXXXXXXX as the context requires;
(e) “College” refers to the College of Physicians and Surgeons of the Province;
(f) “Contract” refers to a written agreement between any ProCorp and the Partnership which will set out the terms and conditions by which a ProCorp will provide Professional Services to the Partnership;
(g) “CRA” refers to the Canada Revenue Agency;
(h) “Electing Partner” means a Partner who elects to provide Professional Services to the Partnership through a ProCorp;
(i) “Existing Partner” means each of, or any one of, the Medical Practitioners or the Existing PCs who is a member of the Existing Partnership, and collectively such persons are referred to as the “Existing Partners”;
(j) “Existing Partnership” means XXXXXXXXXX , Business Number XXXXXXXXXX ;
(k) “Existing Partnership Agreement” means the signed written partnership agreement entered into by the Existing Partners on XXXXXXXXXX , and which governs the Existing Partnership;
(l) “Existing PCs” refers to those corporations which are owned by Medical Practitioners and which are Existing Partners in the Existing Partnership;
(m) “Fees” means the fair market value to be paid by the Partnership to a particular ProCorp as consideration for Professional Services rendered by the ProCorp under the Contract;
(n) “Income” refers to the income or loss for a particular taxation year of the Partnership or Existing Partnership (as the case may be), as computed under subsection 96(1) of the Act;
(o) “Medical Practitioner” means an individual who is a medical doctor registered with the College;
(p) “Non-Electing Partner” means a Partner who does not elect to provide Professional Services to the Partnership through a ProCorp but who provides them directly;
(q) “Non-Professional Services” means any service provided by the Partners on behalf of the Partnership, other than Professional Services, including the administrative and managerial activities currently carried on by the Partners;
(r) “Paragraph” refers to a numbered paragraph in this advance income tax ruling;
(s) “Partner” means each of, or any one of, the Medical Practitioners and who is or will be a member of the Partnership;
(t) “Partnership Agreement” means the new written partnership agreement to be entered into by the Partners for purposes of governing the Partnership;
(u) “Personal Service Business" has the meaning assigned by subsection 125(7);
(v) “Practice” means the business of providing both Professional Services and Non-Professional Services;
(w) “Principal” means a Medical Practitioner who controls an Existing PC;
(x) “ProCorp” means a corporation that will be incorporated pursuant to the BCA and licensed by the Province to carry on the practice of medicine in the Province and will be engaged by the Partnership under a Contract to provide Professional Services as independent contractors;
(y) “Professional Services” means the practice of medicine in the Province;
(z) “Province” means the Province of XXXXXXXXXX ;
(aa) “Related Persons” has the meaning assigned by subsection 251(2);
(bb) “Specified Partnership Income” has the meaning assigned by subsection 125(7); and
(cc) “Taxable Canadian Corporation” or TCC” has the meaning assigned by subsection 89(1).
Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:
1. The Practice is currently carried on by the Existing Partnership as a general partnership in the Province. The Existing Partnership files, and the Partnership will file, an annual information return with the XXXXXXXXXX Taxation Centre, and the Existing Partnership deals with, and the Partnership will deal with, the XXXXXXXXXX Taxation Office. The Taxation Year of the Existing Partnership ends on XXXXXXXXXX. The Existing Partners file, and the Partners will file, annual income tax returns with the XXXXXXXXXX Taxation Centre, and the Existing Partners deal with, and the Partners will deal with, the XXXXXXXXXX Taxation Office.
2. The Existing Partnership is governed by the terms of the Existing Partnership Agreement, effective XXXXXXXXXX . Its location is in the town of XXXXXXXXXX in the Province.
3 All Existing Partners, Principals and Partners are resident in Canada for purposes of the Act. None of the Existing Partners are Related Persons except for XXXXXXXXXX , which are each controlled by persons who are Related Persons. None of the Partners will be Related Persons other than XXXXXXXXXX .
4. The Existing Partnership carries on the business of providing medical services to the public through the operation of the Clinic. The Existing Partners or their Principals provide Professional Services to clients of the Existing Partnership on behalf of the Existing Partnership subject to the terms of the Existing Partnership Agreement. The Existing Partnership currently has XXXXXXXXXX Partners, XXXXXXXXXX of which are Existing PCs while the remaining XXXXXXXXXX are individuals. The list of Existing Partners is contained in Appendix A.
5. The Existing Partnership will be dissolved and the Existing PC’s will be deregistered. The dissolution of the Existing Partnership will be governed by subsection 98(2) of the Act and will result in the fair market value disposition of the interests in the Existing Partnership by the Existing Partners and the disposition of the Existing Partnership’s property, including any goodwill, to the Existing Partners at fair market value. Such property may be contributed subsequently by the Partners to the Partnership at fair market value to the Partnership pursuant to subsection 97(1) of the Act. No ruling has been requested with respect to any of these transactions concerning the dissolution of the Existing Partnership and the creation of the Partnership.
6. The Partners 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. The Partnership Agreement will include the following provisions:
(a) Professional Services and Non-Professional Services will be clearly differentiated.
(b) Any Partner may elect to provide Professional Services through his or her ProCorp. If the Partner so elects, such Electing 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 Medical Practitioners will be permitted to be Partners of the Partnership.
(d) The performance of an Electing Partner's Non-Professional Services by the ProCorp will be prohibited and all Electing Partners will be required to devote the necessary time and energy to complete their portion of the Non-Professional Services.
(e) The allocation of Income to an Electing Partner for a particular taxation year will be dependent on the Electing 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 Income for a taxation year will not take into account any Professional Services provided by the Electing Partner’s ProCorp, nor will it take into account any time spent by the Electing Partner performing Professional Services as an employee of the ProCorp.
(f) All Non-Electing Partners will be required to 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) As long as a ProCorp fully discharges its responsibilities under the Contract, such ProCorp will not be restricted from providing Professional Services to other persons or otherwise prohibited from competing with the Partnership. The Partnership Agreement will also specify that Electing Partners are not restricted from competing with the Partnership in respect of the provision of 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 the ProCorps or the Electing Partners from competing with the Partnership in respect of the provision of Professional Services.
7. Each Partner will incorporate a ProCorp, which will be required to have the following properties:
(a) It will be incorporated pursuant to the laws of the Province and will obtain a Certificate 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.
(d) 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.
(e) An Electing Partner will be the sole director of his or her ProCorp and will also enter into a written employment agreement with his or her ProCorp to receive a salary in return for providing Professional Services for the benefit of the ProCorp.
(f) An Electing Partner cannot be an employee, officer, director, or legal or beneficial shareholder of more than one professional corporation.
(g) As set out in the Partnership Agreement, a ProCorp cannot be a Partner in the Partnership.
(h) No two ProCorps will be Related Persons with the exception of the ProCorps incorporated by Partners who are the XXXXXXXXXX identified in Paragraph 3.
8. A Contract between the Partnership and a ProCorp will contain the following terms:
(a) 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 to practice medicine or where the Electing Partner of the ProCorp ceases to be a Partner.
(b) The ProCorp will provide Professional Services on behalf of the Partnership as an independent contractor in return for Fees. Fees will be negotiated between the ProCorp and the Partnership and will be equal to the fair market value of the Professional Services provided by the ProCorp to the Partnership.
(c) All payments received by the Partnership in respect of Professional Services provided by the ProCorp under the Contract will be for the benefit of the Partnership, and if any such amounts are received by a ProCorp, they will be remitted to the Partnership.
(d) Provided that a ProCorp fully discharges its responsibilities under the Contract, such ProCorp will not be restricted from providing Professional Services to other persons or otherwise be prohibited from competing with the Partnership.
(e) The Partnership will provide all of the facilities, equipment, and instruments of the Clinic and, where necessary, will make them available to the ProCorps in order that the ProCorps can provide the Professional Services under the Contract. The ProCorps will be required to reimburse the Partnership for the fair market value of any such items provided, whether by way of offset or otherwise.
(f) Each ProCorp will be responsible for the following expenses:
(i) Professional membership fees in respect of the Electing Partner;
(ii) Professional liability insurance, life or disability insurance for the Electing Partner, if any;
(iii) Travel expenses, including car, accommodation and meal;
(iv) Communication expenses;
(v) Expenses related to maintaining the professional standards set by the Partnership or by the College;
(vi) Office equipment and supplies relevant to the general business of the ProCorp; and
(vii) Expenditures on personal practice preferences of the ProCorp.
9. Within XXXXXXXXXX months of the date of this Ruling, the Partners will elect under the Partnership Agreement to provide Professional Services through their particular ProCorps, and, immediately thereafter, the ProCorps will enter into Contracts with the Partnership for the purpose of providing such professional services.
Purpose of the Proposed Transactions
The primary objective of the proposed transactions is to restructure the Practice to allow Partners to render Professional Services to the Partnership and others through professional corporations. 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 preferences;
(b) to permit Partners the flexibility of providing Professional Services to the Partnership by entering into a Partnership Agreement and Contracts containing clear provisions permitting such;
(c) 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;
(d) to provide Partners with more control over their estate and financial planning;
(e) to enhance the Partnership's ability to retain Partners; and
(f) to permit enhanced protection of assets of the 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, 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.
G. 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 and any property transferred on the dissolution of the Existing Partnership and the formation of the Partnership. 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 dissolution of the Existing Partnership and the formation of the Partnership, including the issue of whether the Partnership will be a partnership at law. Accordingly, we have not confirmed whether there will be any income tax consequences as a result of the dissolution of the Existing Partnership and the formation of 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
List of Existing Partners
Name of Existing Partner SIN or BN
List of Partners
Name of Partner SIN
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