CRA permits multiple access to the small business deduction following the conversion of a professional partnership to a corporation

CRA has ruled on the conversion of a professional partnership into a CCPC (Newco) under ss. 85(2) and (3), following which individual partners will provide their respective services to Newco through their personal corporations.  Their corporations are not required to share the small business deduction under the specified partnership income rules provided that they are not considered to be in partnership with each other.  CRA accepted a representation that the professional corporations are not partners of each other, including representations that each such corporation is free to compete with Newco.  CRA also ruled that the personal corporations did not carry on personal services businesses.

On the partnership-to-Newco conversion, the requirement in s. 85(3) that the partnership property immediately before the winding-up consist exclusively property received as consideration for the drop-down of eligible property to Newco (or money) was satisfied by having Newco acquire any non-eligible property of the partnership as consideration for the assumption of liabilities rather than for issuing promissory notes or preferred shares.  Furthermore, the promissory note and preferred share consideration was handled on the basis of issuing one note and one share corresponding to each of the partners, but with a representation that this consideration was beneficially acquired by the partnership rather than by the respective partners – notwithstanding that the partnership was wound up a day later with each partner receiving ‘his or her" preferred share and promissory note on the winding-up.  No s. 85(2) or (3) rulings were requested respecting these conversion transactions.

Neal Armstrong.  Summaries of 2012 Ruling 2011-0392041R3 under s. 125(7) – specified partnership income and s. 85(3).