25 March 1997 External T.I. 9634905 - SERVICES PARTNERSHIPS AND PROFESSIONAL FIRMS

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

Document No.: 9634905 (E)
Author: Allan Nelson (613) 957-9768
Document Type: External Technical Interpretation Inquiries
Reference Date: March 25, 1997
Subject: Services Partnerships and Professional Firms
Section Ref.: 96, 67, 103

Principal Issues:

Is use of a services partnership (instead of a management corporation) to provide non-professional services to professional firms acceptable?

Position:

Probably, but cannot give an unqualified opinion. We would want to examine a live deal before giving an unqualified opinion.

Reasons:

Similar position previously given in file #960399 & 5-8653). Service partnerships must meet the same requirements as we have outlined many times in the past for management corporations (i.e. reasonable expenses, etc.). Question of fact that has to be determined in each case.

	                               	963490
XXXXXXXXXX  	                            Allan Nelson
(613) 957-9768

Attention: XXXXXXXXXX

March 25, 1997

Dear Sirs:

Re: Technical Opinion Request
Professional Firm Service Partnerships

This is in reply to your letter dated October 16, 1996, in which you requested our comments concerning the use of service partnerships by professional firms.

Historically a large number of professional firms have participated in arrangements whereby non-professional services were provided to the particular firm by a management corporation. Typically, the shares of the management corporation were owned by or for the benefit of members of the families of the various members of the professional firm. Examples of the services provided by the management corporation include the supplying of secretarial, bookkeeping, telephone answering and clerical services to the firm, as well as supplying leased premises and equipment and providing repairs thereto, as required. Some of the principal concerns with such arrangements have been that the charges made by the management corporation to the professional firm be reasonable and that the mark-up on certain expenses incurred by the corporation and charged to the professional firm not exceed 15% of the amount of those expenses.

In the past couple of years various professional firms have opted to use a partnership (a "Services Partnership") instead of a management corporation to provide the same non-professional services to them. These partnerships may be limited or general partnerships, the members of which include inter vivos trusts for the benefit of members of the families of the various members of the professional firm.

You have asked us to advise you what the Department's attitude is towards arrangements using Services Partnerships and you also referred to previous letters on this matter issued by the Department which indicates that such arrangements are acceptable (our file numbers 5-7772, 5-8653, 5-952363 and 5-960399).

While we would expect our position on this matter to remain the same as outlined in the most recent of the letters you referred to (our file number 5-960399, dated March 27, 1996), we have not yet examined a particular situation. Upon such an examination, it is possible that our position may vary, in light of the recent changes to the Income Tax Act concerning the taxation of partnerships. We also have concerns regarding the possible application of section 103 of the Act, or the avoidance of that provision, in a specific situation. As previously stated in our earlier letters, the acceptance of claims involving the use of services partnerships involves a question of fact which can only be determined by a thorough review of the circumstances of each particular situation.

In accordance with paragraph 22 of Information Circular 70-6R3, the above comments are only expressions of opinion, and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

Chief
Partnerships Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch