14 July 1993 Income Tax Severed Letter 930241A - Management Services Company

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                              930241
XXXXXXXXXX                                    W.P. Guglich
                                              (613) 957-2102

Attention: XXXXXXXXXX

July 14, 1993

Dear Sirs:

Re: Management Services Company

This is in reply to your letter of January 27, 1993 wherein you requested our views respecting a proposed management company for a dentist.

You describe the following situation:

- The taxpayer is a dentist who is considering setting up a new practice as a sole proprietor.

- The taxpayer's wife wishes to incorporate a Company under which she would be the sole shareholder.

- The taxpayer's wife works directly for and is paid directly for the practice.

- The dentist will be the sole employee of the company but does not intend to take any salary or fee for the services he will render on behalf of the company.

- The company will negotiate and will either buy or lease new premises that will be sublet to the practice. The company will also buy or lease all furniture and equipment, supplies and laboratory requirements which in turn will be furnished to the dentist.

- The company intends to charge the dentist its cost of acquiring the premises, equipment and supplies, etc., plus 15%.

You request our views, whether the company could be considered to be carrying on a "personal services business" as described in paragraph 125(7)(d) of the Act, or a "specified investment business" as described in paragraph 125(7)(e), and whether section 245 of the Act would apply.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Our Views:

Our position remains as stated in answer to question 18 of the Thirty-Seventh Canadian Tax Foundation Conference, 1985 Revenue Canada Round Table Questions & Answers (a copy is enclosed for your convenience). The Department may, however, question whether a management service corporation, in the type of situations you describe, is in fact carrying on a business. This will be the case where the management service corporation charges a fee to the professional practice and there are not enough management service company employees to perform the functions in respect of which the professional practice is being billed or, where the professional himself performs the functions in respect of which the professional practice (sole proprietorship) is being billed. Examples would include the purchase of supplies ordered and handled by the employees of the professional practice, or general and laboratory services that have been performed by employees of the professional practice or such functions as are performed by the professional practitioner himself. A 15% mark-up by the management service corporation in such situations would, in our view, be unreasonable.

It is a question of fact dependent on all the details and circumstances of a specific case whether a particular company could be considered to be carrying on a "specified investment business" or a "personal services business" as those terms are described in paragraphs 125(7)(e) and 125(7)(d) of the Act. The Department's views respecting these two terms are described at length in paragraphs 10 to 22 of Interpretation Bulletin IT-73R4 .

The determination as to whether section 245 of the Act has application in a specific case can only be made after all the facts and details in the particular case have been established and reviewed. We have stated in paragraph 17 of Information Circular 88-2 that the failure to pay a salary would not in and by itself result in the application of subsection 245(2) of the Act.

We trust our comments will be of assistance.

Yours truly,

E. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch