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 a professional corporation, providing medical services to another corporation, will be carrying on a "personal services business" within the meaning of subsection 125(7) of the Act.
Position: No.
Reasons: The former partners that are providing services through a "Contracting Company" do not provide services to Newco in his/her capacity as an employee or officer of Newco.
XXXXXXXXXX 2004-006901
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above noted individuals and partnership.
We understand that, to the best of your knowledge, none of the issues involved in the ruling request:
(i) is in an earlier return of the taxpayer or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) is under objection or appeal by the taxpayer or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), 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 definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
(a) "CRA" is the Canada Revenue Agency;
(b) "Province" is the Province of XXXXXXXXXX;
(c) "Partnership" is a reference to the existing partnership of "XXXXXXXXXX", which was formed pursuant to the laws of the Province on XXXXXXXXXX, and registered on XXXXXXXXXX;
(d) "College" means the XXXXXXXXXX of the Province;
(e) "Partner" is a reference to each of, or any of, XXXXXXXXXX and, collectively, they are referred to as the "Partners";
(f) "Newco" means XXXXXXXXXX, a new company to be incorporated pursuant to the laws of the Province;
(g) "Contracting Company" means each of the companies that will be incorporated for the benefit of an existing Partner of the Partnership to carry on an independent medical practice and, collectively, they are referred to as the "Contracting Companies";
(h) "Contracting Professional" means any of the existing Partners of the Partnership who may choose to enter into contractual relations with Newco for the provision of professional services as an independent contractor and, collectively, they are referred to as the "Contracting Professionals";
(i) "Facilities" means all of the following medical facilities: XXXXXXXXXX;
(j) "Government" means XXXXXXXXXX, the Province's medical insurance organization, which is a separate entity from the Facilities that has its own budget;
(k) "Practice" means the provision of clinical/medical services, including XXXXXXXXXX services, currently provided by the Partnership;
(l) "Professional" refers to each individual physician who currently provides clinical/medical services to the Partnership as required in the Practice;
(m) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7) of the Act;
(n) "Cost amount" has the meaning assigned by subsection 248(1) of the Act;
(o) "Eligible Property" has the meaning assigned by subsection 85(1.1) of the Act;
(p) "Personal services business" has the meaning assigned by subsection 125(7) of the Act;
(q) "Related persons" has the meaning assigned by subsection 251(2) of the Act;
(r) "Specified partnership income" has the meaning assigned by subsection 125(7) of the Act;
(s) "Taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1) of the Act.
Facts
1. The Practice is currently carried on by the Partnership. The Partners are the only partners of the Partnership. The Partners of the Partnership have been carrying on business since XXXXXXXXXX. The Partners provide XXXXXXXXXX (the "Professional Services") to the Partnership.
2. The Partnership's identification number is XXXXXXXXXX. The Partnership files its information returns with the XXXXXXXXXX Taxation Center and deals with the XXXXXXXXXX Tax Services Office.
3. The Partners provide their Professional Services, through the Partnership, at the Facilities. The Partners also have certain "privileges" at some of the Facilities. These privileges exist for the purpose of XXXXXXXXXX.
4. The Partnership provides the Professional Services on a "fee for service" basis or on a contract basis. Remuneration for services provided to patients is paid by the patients, by third parties, such as private insurance companies, or by the Government.
5. The Partnership has retained the services of an outside management company to prepare the daily billings for Professional Services provided at the Facilities and payable by the Government. The responsibility for payment for these Professional Services provided by the Partnership rests with the Government and not the management company.
6. The Partnership is bound by a written partnership agreement (the "Partnership Agreement") that was signed by the Partners on XXXXXXXXXX, and amended on XXXXXXXXXX.
7. The major terms of the Partnership Agreement are as follows:
(a) The Partners are all partners in the Partnership without differentiation;
(b) Any income earned by a Partner is treated as Partnership income and any money received by a Partner, which is not deposited with the Partnership by such Partner, will be treated as a payment on account of the Partner's share of the income of the Partnership and will reduce the Partner's capital account;
(c) The Partners share in the profits of the Partnership is based on a formula that takes into account their contributions to the overall revenue of the Partnership;
(d) The Partnership provides certain minimum coverage for office overhead, disability and life insurance, for the Partners. The Partners are responsible for obtaining their own extra coverage for short and long-term disability and life insurance, as they may decide;
(e) Each Partner shall have a capital account to which shall be credited the amount of all contributions and the amount of income allocated to a Partner and to which shall be debited the amount of any loss allocated to a Partner, amounts described in paragraph 7(b) above and any withdrawal of "Distributable Cash", as defined in the Partnership Agreement;
(f) Each of the Partners must employ themselves diligently and exclusively in the business of the Partnership and must use the utmost endeavors to promote the interests of the Partnership;
(g) Each Partner is entitled to receive an amount, to be determined at the time, upon the death, retirement, withdrawal or expulsion of the Partner.
8. All of the Partners are residents of Canada. None of the Partners are related to any other Partner.
Proposed Transactions
9. Newco will be incorporated as a CCPC and a TCC.
10. Upon incorporation, Newco will be authorized to issue an unlimited number of voting common shares (the "Shares") without nominal or par value. One of the Shares (the "Initial Share") will be issued to one of the Partners upon incorporation. Newco will receive a $XXXXXXXXXX cash subscription from that Partner. The particular Partner has not yet been determined.
11. Newco will make an application to the College for a permit to practice medicine in the Province.
12. After Newco obtains a permit from the College, the Partnership will sell all of its assets to Newco at fair market value. In exchange, Newco will assume all of the liabilities of the Partnership, issue an additional XXXXXXXXXX Shares (the "Additional Shares"), as described in paragraph 15 below, and issue a demand, non-interest bearing promissory note (the "Promissory Note"), as described in paragraph 16 below. The amount of the Promissory Note will be equal to the cost amount of the assets transferred to the Partnership less the amount of the liabilities assumed by Newco, plus the $XXXXXXXXXX of paid-up capital attributable to the Additional Shares. Newco and each of the Partners will jointly elect, pursuant to subsection 85(2) of the Act, in prescribed form and within the time permitted by subsection 85(6) of the Act, to have the provisions of paragraphs 85(1)(a) to (i) of the Act apply, with such modifications as the circumstances require. The "agreed amount" for the assets transferred to Newco will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) of the Act, will not be less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act, and will not be less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) of the Act. Furthermore, the "agreed amount" will not exceed the respective fair market value of each asset transferred to Newco nor will it be less than the amount permitted by paragraph 85(1)(b) of the Act.
13. Newco will redeem the Initial Share, following which Newco will only have the Additional Shares issued and outstanding.
14. On the day immediately following the transfer of all of the assets of the Partnership to Newco and the redemption of the Initial Share by Newco, the Partnership will wind up its affairs in accordance with subsection 85(3) of the Act. Immediately before this winding-up, the Partnership will have no property other than the property received from Newco as consideration for the disposition to it of the Partnership's assets. Specifically, the only property in the Partnership will be the Additional Shares and the Promissory Note. Each Partner will receive, in complete satisfaction of his or her interest in the Partnership, one of the Additional Shares and a pro-rata share, based on his or her respective interest in the Partnership, of the Promissory Note.
15. For legal simplification, the Additional Shares shall be issued in the name of each Partner (one of the Additional Shares each) instead of the name of the Partnership. The Partnership, not the individual Partners themselves, will be the beneficial owner of the Additional Shares.
16. For legal simplification, the Promissory Note issued by Newco shall be issued in the name of each Partner (based on a pro rata share) instead of the name of the Partnership. The Partnership, not the individual Partners themselves, will be the beneficial owner of the Promissory Note.
17. The shareholders (the "Shareholders") of Newco will elect Newco's directors (the "Directors"). The Shareholders anticipate that each will become a Director.
18. The Shareholders will enter into an agreement (the "Shareholder's Agreement") that will provide, but not be limited to, the following:
(a) The business of Newco will be the carrying on of the existing Practice;
(b) Newco will carry out its business by entering into contracts with independent contractors to provide the Professional Services;
(c) Each Shareholder may, if he/she so requests, be a member of the board of directors of Newco (the "Board of Directors");
(d) The officers of Newco will be elected by the Directors;
(e) At the sole discretion of the Directors, the after-tax profits of Newco will, from time to time and at the discretion of the Directors, be available for distribution in the form of dividends on the outstanding shares;
(f) The alienation or transfer of issued shares of Newco shall be restricted to the occurrence of a Termination Event, as defined in section XXXXXXXXXX of the Shareholder's Agreement.
19. Newco will carry on the Practice by providing the Professional Services in the following ways:
(a) Through Contracting Professionals who are individuals licensed to practice medicine in the Province and engaged by Newco to provide Professional Services as independent contractors. The Contracting Professionals will be engaged by Newco to provide such Professional Services on its behalf; and
(b) Through Contracting Companies engaged by Newco to provide various Professional Services as independent contractors. The Contracting Companies will provide such Professional Services on behalf of Newco. Each Contracting Company will employ an individual licensed to practice medicine in the Province.
20. Each Partner will have the option of providing Professional Services to Newco by entering into a contract for service with Newco as a Contracting Professional or as a Contracting Company.
21. In the future, other Professionals, who are not currently Partners, may enter into a contract for service with Newco upon such terms as the respective Professional and Newco may agree.
22. The Partners who choose to enter into a contractual relationship with Newco agree to provide certain Professional Services as a Contracting Professional and will receive a per diem fee as compensation for the Professional Services provided to Newco. The amount of the per diem fee will be negotiated on a case-by-case basis and will vary with the number and type of Professional Services to be provided by the Contracting Professional. This arrangement will be evidenced by a written contract, which agreement will provide, among other things, that:
(a) The Contracting Professional and Newco agree to practice medicine in association, whereby the Contracting Professional, as an independent contractor, shall provide certain Professional Services to Newco, as required to carry on the Practice;
(b) The contract shall be for a fixed period, but may be terminated by either party upon XXXXXXXXXX days notice;
(c) The obligation of the Contracting Professional shall be set out in a negotiated "practice profile". The practice profile will specify the number of work days per year that a Contracting Professional will agree to provide the following types of service:
(i) clinical practice, including "on call" responsibility;
(ii) clinical practice, not including "on call" responsibility;
(iii) administration; and
(iv) other.
The practice profile will also describe the level of services which is expected to be provided in an average day. To the extent that the number of procedures performed in a day varies from such average, the per diem rate payable for a day will be adjusted accordingly;
(d) A per diem rate will be established for each of the various procedures to be provided in the services described in paragraph 22(c) above. The rate will take into account such factors as difficulty, risk to the practitioner, and the requirement to work outside of normal hours;
(e) A Contracting Professional shall be paid by Newco, for each type of service provided and based upon the established per diem rate for the procedures performed, on the last day of each month;
(f) All payments from the Government, patients and third parties, in respect of services provided by a Contracting Professional for the benefit of Newco, will be made directly to Newco or to an agent of Newco established for the receipt of such payments;
(g) Newco will supply a Contracting Professional with certain supplies, instruments, facilities and equipment that will be required to provide Professional Services to Newco. The Contracting Professional will be responsible for all expenses incurred in respect of the following:
(i) professional membership fees and insurance;
(ii) continuing professional education;
(iii) transportation;
(iv) communication;
(v) maintaining the professional standards set by the Facilities or the College from time to time; and
(vi) expenditures on personal practice preferences of the Contracting Professional;
(h) The particulars of a Contracting Professional's practice profile, including the per diem compensation rate, will be negotiated on an individual basis for each year of the term of the written contract.
23. So long as a Contracting Professional fully discharges his/her responsibilities under the services contract with Newco, he/she will not be restricted from providing services to other persons or otherwise prohibited from competing with Newco. Likewise, on the termination of a Contracting Professional's association with Newco, the Contracting Professional shall not be prohibited in any way from competing with Newco.
24. The Partners who choose to enter into a contractual arrangement with Newco through a Contracting Company will be required to enter into a signed written agreement with Newco upon the same basis as a Contracting Professional, mutatis mutandis. There will not be any other contractual relations between or among any of Newco and the Contracting Companies.
25. Each Contracting Company will obtain a permit from the College prior to entering into a contract with Newco. This will enable a Partner to provide Professional Services to Newco through such a Contracting Company.
26. Each Contracting Company will be controlled by the respective Partner who will be the legal and beneficial owner of all of the voting shares of the Contracting Company. The sole officer and director of a Contracting Company will be the respective Partner that incorporated the Contracting Company.
Non-voting shares of each Contracting Company may be owned by members of the Partner's family. However, none of these non-voting shares will be issued as part of the proposed transactions described herein.
All persons legally or beneficially owning shares of a Contracting Company will be residents of Canada.
27. A legal or beneficial shareholder of a Contracting Company will not be a legal or beneficial shareholder of another Contracting Company.
28. The sole officer and director of a Contracting Company will be an employee of the Contracting Company and will provide Professional Services for the benefit of the Contracting Company pursuant to the terms of its contract with Newco.
29. Each Partner will not be an employee, officer, director or shareholder, either legally or beneficially, of more than one Contracting Company. Related persons of a Partner may only be shareholders of the Contracting Company in which that Partner owns shares.
30. Only Partners of the Partnership will have the option to choose which contractual arrangement they will establish with Newco. The Board of Directors of Newco will determine, as the need arises, what contractual arrangements will be offered to individuals that are not currently associated with the Partnership.
31. Newco will estimate its annual revenues and endeavour to contract with the Contracting Professionals and the Contracting Companies in such a manner that will result in an annual profit to Newco. To the extent Newco's taxable income for any particular taxation year exceeds two hundred thousand dollars ($200,000), the excess will likely be distributed, in the absolute discretion of the Directors, as fees, bonuses or similar payments to the Directors.
Purpose of the Proposed Transactions
32. The purpose of the proposed transactions is to restructure the Practice of the Partnership without adverse tax consequences. The Partners will continue to provide the Professional Services of the Practice but with the following advantages:
(a) Eliminate joint and several liability inherent in providing the Professional Services through a partnership;
(b) Provide a vehicle through which an individual Partner may, if he or she so wishes, provide professional services external to the Practice carried on by Newco;
(c) Provide each Partner with an increased level of control over his or her participation in the Practice through individual management of personal practice preferences;
(d) Permit each Partner to have control over expenditures, where such expenditures may not be in the interest of all participants in the Practice;
(e) Provide each Partner with more options and more control in arranging estate planning;
(f) Facilitate easier entry to, and exit from, the Practice.
Rulings
Provided that:
(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose 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;
our rulings are as follows:
A. Subject to sections 18 and 67 of the Act, the fees payable by Newco to an independent contractor, to a Contracting Professional or a Contracting Company for Professional Services, as described in paragraphs 22 and 24 above, will be deductible by Newco in computing the profit or loss from its business pursuant to section 9 of the Act.
B. Provided that a Partner providing Professional Services to Newco through a Contracting Company would not, but for the existence of the Contracting Company, be an officer or employee of Newco in respect of those Professional Services, then each such Contracting Company will not be considered to be carrying on a "personal services business" as defined by subsection 125(7) of the Act.
C. Provided that a partnership does not exist between Newco and any Contracting Company, the income earned by Newco or any Contracting Company will not be "specified partnership income" as defined by subsection 125(7) of the Act.
D. As a result of the proposed transactions, in and by themselves, the provisions of subsection 245(2) of the Act will not be applied to re-determine the tax consequences confirmed in the rulings given above.
In accordance with paragraph 2 of Interpretation Bulletin - IT 378R "Winding-up of a Partnership" ("IT-378R"), it is the CRA's view that issuing the Additional Shares in the name of each Partner, instead of the Partnership, as described in paragraphs 12 and 15 above, will not invalidate the application of subsection 85(2) of the Act nor the subsequent application of subsection 85(3) of the Act.
In accordance with paragraph 2 of IT-378R, it is the CRA's view that issuing the Promissory Note in the name of each Partner, instead of the Partnership, as described in paragraphs 12 and 16 above, will not invalidate the application of subsection 85(2) of the Act nor the subsequent application of subsection 85(3) of the Act.
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 Newco and each of the Contracting Companies. In general, where a business that was previously carried on in a partnership is subsequently carried on by the former partners, and no longer in partnership for 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. A particular determination of the reasons for such reorganization would be a question of fact. Based on the facts and proposed transactions described herein, it is our view that the Partners incorporation of the Partnership's business activities will not, in and of itself, cause subsection 256(2.1) of the Act to be applicable.
The application of subsection 256(5.1) of the Act is determined "at any time where, at that time ...". We are therefore unable to rule that this provision will never apply to Newco and each of the Contracting Companies. Based on the facts and proposed transactions described herein, it is our view that, at the time that Newco acquires the Practice, no Contracting Company will have sufficient direct or indirect influence of Newco to cause subsection 256(5.1) of the Act to apply at that time.
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 ownership of any non-voting shares of a Contracting Company, as described in paragraph 26 above, 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 Contracting Company to a spouse or child of the Partner who owns the voting shares of the Contracting Company.
Whether or not a Contracting Professional is an employee of Newco or is an independent contractor who has entered into a contract for services with Newco is a question of fact that can only be determined after a review of the actual agreement entered into between the Contracting Professional and Newco. This review and determination is the responsibility of the Contracting Professional's local tax services office.
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.
Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004