26 September 2022 External T.I. 2021-0895761E5 - Taxation of stipends

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 stipends earned through a physician's corporation are taxable under section 5 of the Act.

Position: No.

Reasons: Consistent with prior published positions.

XXXXXXXXXX
B. Leung
								2021-089576

September 26, 2022

Dear XXXXXXXXXX:

Re: Taxation of stipends

We are writing in response to your correspondence dated May 20, 2021 regarding the taxation of stipends earned through a physician’s professional corporation.

In the situation you described, a physician is appointed to serve as Chief of Department by the board of directors of a hospital. The hospital enters into a contract with the physician’s professional corporation for the services of a Chief of Department. The contract provides for a stated annual remuneration amount, which are paid in monthly sums (stipends) by the hospital to the professional corporation.

You indicate that as Chief of Department, the physician holds an office and that the stipends earned are thereby employment income. You asked whether these stipends remain taxable under section 5 of the Income Tax Act (Act) when they are paid to the physician’s professional corporation under contract.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

In the situation you describe, we concur that the physician would be regarded as an officer of the hospital (that is, an individual holding an office for purposes of the Act) if it were not for the existence of the professional corporation.

However, it is the general view of the Canada Revenue Agency (CRA) that if there is no legal or regulatory prohibition against a physician providing Chief of Department services through a professional corporation, and the professional corporation is factually carrying on the business of providing those services, the income generated from those services would be considered to be income of the corporation under section 9 of the Act. That is, the business income of the corporation would not be included in the physician’s income (as income from an office) by virtue of subsections 56(2) and 56(4) of the Act.

Further, if the physician is a specified shareholder of the corporation and the corporation does not employ more than five full time employees, the professional corporation may be carrying on a personal services business (PSB) as defined in subsection 125(7) of the Act. When a professional corporation carries on a PSB, there are other provisions of the Act (footnote 1) that apply to effectually tax the income at a higher corporate tax rate while restricting deductible expenses. These provisions ensure that income from a PSB is taxed in a manner that is comparable to that of income earned from office or employment, without characterizing the income as such (that is, as income from an office or employment).

Whether the professional corporation described is factually carrying on the business of providing Chief of Department services (performed by the physician on behalf of the corporation) is a question of both fact and law. Generally, only if it can be established that the professional corporation you describe was not factually carrying on the business of providing such services would the income be considered to be earned by the individual physician (as income from an office) rather than by the professional corporation (as business income).

We trust that these comments will be of assistance to you.

Yours truly,

Tom Baltkois, CPA, CGA
Acting Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Under the Act, the income from a PSB is not eligible for the small business deduction or the general rate reduction, and is also subject to an additional 5% tax (pursuant to section 123.5 of the Act). Further, the deductions that may be claimed in computing income from a PSB are significantly restricted (paragraph 18(1)(p) of the Act).