2012 Ruling 2011-0392041R3 - Incorporation of a Professional Partnership

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 the incorporation of a professional partnership and the subsequent contracting out of the professional services of the new corporation to the professionals/shareholders will result in the application of the small business deduction limitations for "personal services business" or the "specified partnership income."

Position: No.

Reasons: The facts and proposed transactions are consistent with other rulings given on these issues.

XXXXXXXXXX
2011-039204

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Partnership") and the "Named Partners," (see Appendix).

We are writing in response to your letter of XXXXXXXXXX, as amended by your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the Partnership and the Named Partners. We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Partnership and the Named Partners (collectively the "Taxpayers"), none of the issues involved in the ruling request is:

i. in an earlier return of any of the Taxpayers or a related person;
ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by any of the Taxpayers or a related person;
iii. under objection by any of the Taxpayers or a related person;
iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), 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 definitions unless otherwise indicated.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

The following definitions have been used in this letter:

(a) XXXXXXXXXX;

(b) "XXXXXXXXXX" means funds paid to the Partnership under the provisions of the XXXXXXXXXX;

(c) "Canadian-controlled private corporation" or "CCPC" has the meaning assigned by subsection 125(7) of the Act;

(d) "XXXXXXXXXX" means XXXXXXXXXX, currently provided by the Partners through the Partnership directly or through an Existing Contracting Corporation;

(e) XXXXXXXXXX;

(f) "Common Shares" means common voting shares of Newco;

(g) "Common Shareholder" means a Professional who is an individual and who holds Common Shares in the capital of Newco and collectively they are referred to as Common Shareholders;

(h) "Contract" refers to a written agreement between Newco and a Contracting Professional or a New Contracting Corporation by which the latter will provide XXXXXXXXXX as an independent contractor;

(i) "Contracting Professional" means a Common Shareholder who elects to enter into an independent contractor relationship with Newco to provide it with XXXXXXXXXX;(j) "Corporations Act" means the Business Corporations Act XXXXXXXXXX;

(k) "Cost Amount" has the meaning assigned by subsection 248(1) of the Act;

(l) "CRA" means the Canada Revenue Agency;

(m) "Elected Amount Parameters" means, with respect to any transfer of property in respect of which the transferor and the transferee have elected to have the provisions of section 85 of the Act apply, the limits on the "agreed amounts" that the transferor and transferee may select in respect of the transfer that are stipulated in section 85 of the Act and in accordance with the following:

i. for non-depreciable capital property and inventory, an amount not less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

ii. for eligible capital property, an amount not less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act;

iii. for depreciable capital property, an amount not less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) of the Act;

iv. for all types of property, an amount not exceeding the fair market value of the property in question; and

v. for all types of property, an amount not less than the fair market value of any non-share consideration received by the transferor from the transferee in respect of such property;

(n) "Existing Contracting Corporation" means any of the corporations that are owned by the Partners and which have entered into contracts with the Partnership for the provision of XXXXXXXXXX as independent contractors;

(o) "Fees" means the fair market value fees to be set out under the Contract between a Contracting Professional or a New Contracting Corporation and Newco

(p) XXXXXXXXXX;

(q) "Named Partners" refers to those Partners who, along with the Partnership, have requested this ruling (see Appendix);

(r) "Newco" means a new Professional Corporation which will be incorporated pursuant to the laws of the Province and which will carry on the XXXXXXXXXX formerly carried on by the Partnership;

(s) "New Contracting Corporation" means any of the new corporations that will be incorporated by a Common Shareholder and which will enter into a Contract with Newco;

(t) "Paid-Up Capital" has the meaning assigned by subsection 89(1) of the Act;

(u) "Partner" is a reference to a partner of the Partnership;

(v) "Partnership Income" refers to the Partnership's income or loss for a particular Taxation Year as computed under subsection 96(1) of the Act;

(w) "Partnership Agreement" means the agreement governing the Partnership and which is entitled the "XXXXXXXXXX";

(x) "Personal Services Business" has the meaning assigned by subsection 125(7) of the Act;

(y) "XXXXXXXXXX" means the activities undertaken by the Partnership or Newco from time to time relating to the XXXXXXXXXX and ancillary activities, currently consistingXXXXXXXXXXof the XXXXXXXXXX at the XXXXXXXXXX and other locations, including other XXXXXXXXXX in the XXXXXXXXXX region;

(z) "Professional" means an individual who is a member of the XXXXXXXXXX who holds a certificate of registration XXXXXXXXXX issued by the XXXXXXXXXX;

(aa) "Professional Corporation" means a corporation that is incorporated under the Corporations Act and has obtained a Certificate of Authorization from the XXXXXXXXXX permitting it to provide XXXXXXXXXX in the Province;

(bb) "Province" means the Province of XXXXXXXXXX;

(cc) "Related Persons" has the meaning assigned by subsection 251(2) of the Act;

(dd) "Specified Partnership Income" has the meaning assigned by subsection 125(7) of the Act;

(ee) "Taxable Canadian Corporation" or "TCC" has the meaning assigned by subsection 89(1) of the Act;

(ff) "Taxation Year" refers to the Partnership's taxation year for income tax purposes which is defined in paragraph 96(1)(b) of the Act as the Partnership's fiscal period; and

(gg) XXXXXXXXXX.

Facts

1. The Partnership was originally formed on XXXXXXXXXX. Each of the Named Partners is a Partner in the Partnership. The Named Partners file their income tax returns with the XXXXXXXXXX Tax Centre and deal with the XXXXXXXXXX Tax Services Office.

2. The XXXXXXXXXX is currently carried on by the Partners at the XXXXXXXXXX and at other locations, including other XXXXXXXXXX, in the XXXXXXXXXX region. XXXXXXXXXX that form part of the XXXXXXXXXX are performed by Partners or by Existing Contracting Corporations.

3. All Partners are resident in Canada for the purposes of the Act. None of the Partners are Related Persons, with the exception of the Partners who are spouses or common-law partners of each other.

4. Each Partner is a member of the XXXXXXXXXX and is authorized XXXXXXXXXX in the Province.

5. The Partnership's identification number is XXXXXXXXXX. The Partnership files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. The main office of the Partnership is located at XXXXXXXXXX.

6. In general terms, the XXXXXXXXXX is carried out using physical space, clerical and administrative staff, and equipment situated at the location where the services are performed. In addition, the Partnership has some of its own physical space and clerical and administrative staff.

7. All of the Partners have XXXXXXXXXX. Some of the Partners are compensated by the XXXXXXXXXX for XXXXXXXXXX and/or administrative services that he or she provides.

8. One of the primary responsibilities of the Partnership is the implementation and administration of the XXXXXXXXXX for the Partners and the management of the XXXXXXXXXX received by the Partnership. In particular, the Partnership's role with respect to the XXXXXXXXXX is as follows:

(a) assist the Partners to enhance the quality and delivery of the activities of the Partnership;

(b) support the Partners in the implementation of new methods of organizing and financing XXXXXXXXXX that combine the activities of the Partnership;

(c) enable the Partners to develop and implement innovative alternatives to the present method of compensation for XXXXXXXXXX involved in the delivery of the activities of the Partnership; and

(d) assist the Partners to monitor the ongoing effectiveness of activities within the mandate of the XXXXXXXXXX.

9. The XXXXXXXXXX also provides funds to support XXXXXXXXXX activities of the Partnership, to support the administrative activities of the XXXXXXXXXX, to support the development of innovative practices in XXXXXXXXXX and to recognize the recruitment efforts of the Partnership.

10. The Partners currently perform XXXXXXXXXX on behalf of the Partnership either personally or through Existing Contracting Corporations.

11. Most of the Partnership Income is distributed monthly to the Partners under the terms of the Partnership Agreement.

12. The Partnership operates pursuant to the principles set forth in the Partnership Agreement. The key terms pursuant to which the Partnership operates are as follows:

(a) The Taxation Year of the Partnership ends XXXXXXXXXX.

(b) All Partners generally share equally in the Partnership's Income unless otherwise agreed by a vote of the Partners.

(c) A Partner may provide XXXXXXXXXX outside of the Partnership and earn income outside of the Partnership.

(d) The Partnership will continue until it is terminated by the affirmative vote of XXXXXXXXXX% of the Partners in attendance at a meeting of Partners.

(e) The following events shall cause a Partner to withdraw from the Partnership:

i. death of the Partner;

ii. total disability of the Partner of more than XXXXXXXXXX months duration unless the Executive Committee grants a further leave;

iii. termination of XXXXXXXXXX staff status of the Partner for any reason whatsoever;

iv. resignation by the Partner from the XXXXXXXXXX staff of the XXXXXXXXXX;

v. resignation of the Partner from the Partnership, which resignation shall require XXXXXXXXXX days prior written notice from the Partner to the Partnership;

vi. expulsion of the Partner from the Partnership; or

vii. XXXXXXXXXX.

13. Upon the occurrence of a termination event for a Partner, that Partner shall be paid any remaining balance in his or her partnership account by way of undistributed revenue together with any remaining balance of capital paid into his or her capital account as at the date of termination or withdrawal. A Partner shall have no other interest in the property of the Partnership.

14 The Partnership's property (the "Property") consists of "Non-85(2) Property" (i.e., cash, accounts receivable and prepaid expenses), and "85(2) Property" (i.e., goodwill, inventory, equipment and other capital property). The Partnership's liabilities (the "Liabilities") consist of accounts payable, accrued liabilities and long-term debt.

PROPOSED TRANSACTIONS

15. Newco will be incorporated under the laws of the Province and will be authorized to issue one class of preference shares (the "Preference Shares") and one class of common voting shares (the "Common Shares") but will be authorized to issue an unlimited number from each class. None of the shares will have any nominal or par value. Upon incorporation, Newco will issue 1 Common Share to each of the Partners, including the Named Partners, for nominal consideration. Newco will be a CCPC and a TCC. All Common Shareholders of Newco will be Professionals who are individuals.

16. Newco will make an application to the XXXXXXXXXX for a certificate of authorization XXXXXXXXXX in the Province.

17. After Newco obtains the required certificate of authorization from the XXXXXXXXXX, the Partnership will transfer all of the Property to Newco at their fair market value. As consideration for the transfer of the Property to Newco, Newco will:

(a) assume all of the Liabilities;

(b) issue to the Partnership a number of Preference Shares equal to the number of Partners as of the effective date of the transfer; and

(c) issue a number of separate demand, non-interest bearing promissory notes (the "Promissory Notes"), which in the aggregate will equal the Cost Amount of the 85(2) Property, less the aggregate of (i) the amount of the Remaining Liabilities assumed by Newco, and (ii) the nominal amount of Paid-Up Capital attributable to the Preference Shares.

18. As sole consideration for the Partnership's transfer to Newco of the Non-85(2) Property, Newco will assume a portion of the Liabilities equal in amount to the fair market value of Non-85(2) Property. The Partnership and Newco will file an election pursuant to section 22 of the Act in respect of the accounts receivable transferred to Newco.

19. With respect to the transfer of the 85(2) Property from the Partnership to Newco, 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. In this regard, the parties will agree that the "agreed amounts" for each particular Property or group or class of Property will be an amount that falls within the Elected Amount Parameters.

20. As consideration for the Partnership's transfer to Newco of the 85(2) Property, Newco will: (i) assume the "Remaining Liabilities" (ie. the portion of the Liabilities remaining after the transfer of the Non-85(2) Property), (ii) issue the Promissory Notes to the Partnership, and (iii) issue the Preference Shares to the Partnership.

21. In order to facilitate the wind up of the Partnership, and in accordance with the administrative policy of the CRA set forth in Interpretation Bulletin IT-378R, one Newco Preference Share will be issued in the name of each Partner instead of in the name of the Partnership. Notwithstanding the foregoing, the Partnership, and not the individual Partners themselves, will be the beneficial owners of the Preference Shares at the time that they are issued. In the same manner, one Promissory Note will be issued in the name of each Partner. The amount of each Promissory Note will be equal to that Partner's pro rata share of the aggregate Promissory Notes, based on his or her respective interest in the Partnership. However, the Partnership, and not the Partners themselves, will be the beneficial owner of the Promissory Notes at the time they are issued.

22. On the day immediately following the transfer of the Property to Newco, the Partnership will wind up its affairs in accordance with subsection 85(3) of the Act. Immediately prior to the winding up, the Partnership will have no property other than the consideration it received from Newco in respect of the disposition of the 85(2) Property to Newco. Specifically, the only property in the Partnership will be the Preference Shares and the Promissory Notes.

23. In connection with the winding-up, each Partner will receive, in complete satisfaction of his or her interest in the Partnership, one Newco Preference Share and a Promissory Note that will be equal in amount to that Partner's pro rata share of the aggregate Promissory Notes based on his or her respective interest in the Partnership.

24. The shareholders of Newco will enter into a shareholders agreement (the "Shareholders Agreement") that will provide, amongst other things, for the following:

(a) The business of Newco will be to carry on the XXXXXXXXXX.

(b) Newco's taxation year-end shall be the XXXXXXXXXX.

(c) Each year the Common Shareholders will elect, from amongst their number, the members of Newco's operations committees which shall be the same as the committees of the Partnership. The chiefs of these committees, who are elected by the committee members, will form part of the board of directors. The other directors of Newco will be (i) the XXXXXXXXXX, if a Common Shareholder, (ii) the XXXXXXXXXX, if a Common Shareholder,

(iv) the Past President, (v) possibly a site representative and, (vi) the President who is elected by the other members of the board of directors. The board of directors will also be known as the Executive Committee.

(d) Each Common Shareholder will hold one Common Share.

(e) The officers of Newco will be elected or appointed by the Executive Committee and shall perform the functions assigned to them in accordance with the provisions of the Shareholders Agreement and By-Laws of Newco; meetings of the Executive Committee will be, at a minimum, on a quarterly basis and a quorum for most directors' meetings shall be a majority of the directors. However, notwithstanding the general quorum requirement, a certain number of key decisions will require the approval of XXXXXXXXXX of the directors.

(f) An Executive Manager will be appointed. The Executive Manager will report to the Executive Committee and is responsible for managing the financial and administrative affairs and non-professional human resource issues of Newco.

(g) At the end of each taxation year, Newco's chartered accountants will prepare audited financial statements of Newco in consultation with the Executive Manager and Executive Committee will make any agreed upon necessary revisions which arise from such review.

(i) Shareholder meetings will be held a minimum of XXXXXXXXXX times per year, one of which is the Annual General Meeting. Meetings of Common Shareholders may be called by the Executive Committee or by any XXXXXXXXXX Common Shareholders.

(j) A Common Shareholder will be permitted to provide XXXXXXXXXX outside of Newco and earn income outside of Newco provided that he or she fully discharges his or her responsibility as a Contracting Professional or as an employee of his or her New Contracting Corporation.

(k) Each Common Shareholder is entitled to one vote on matters that come before meetings of Shareholders.

(l) Newco will continue until it is terminated by the affirmative vote of XXXXXXXXXX% of the Common Shareholders in attendance at a meeting of Common Shareholders.

(m) The following events shall cause a Common Shareholder to have withdrawn from Newco:

(i) death of the Common Shareholder;

(ii) total disability of the Common Shareholder of more than XXXXXXXXXX months duration unless the Executive Committee grants a further leave;

(iii) termination of XXXXXXXXXX staff status of the Common Shareholder for any reason whatsoever;

(iv) resignation by the Common Shareholder from the XXXXXXXXXX staff of the XXXXXXXXXX;

(v) a request by the Common Shareholder to have Newco redeem the Common Share that he or she holds, the redemption of which shall require XXXXXXXXXX days prior written notice from the Common Shareholder to Newco;

(vi) expulsion of the Common Shareholder from Newco in accordance with the terms of the Shareholders Agreement; or,

(vii) XXXXXXXXXX.

25. Upon the occurrence of a termination event for a Common Shareholder, the Common Shares and Preference Shares, if any, owned by such Common Shareholder shall be purchased for cancellation by Newco, and that Common Shareholder shall be paid the aggregate of the following amounts owing as at the date of termination or withdrawal:

(a) such Common Shareholder's share of any retained earnings;

(b) the amount paid-up on the Common Share held by such Common Shareholder;

(c) if applicable, the amount owing in respect of the Promissory Note held by such Common Shareholder;

(d) if applicable, the redemption amount of any Preference Share held by such Common Shareholder; and,

(e) any other amount that such Common Shareholder is entitled to receive under the provisions of the Shareholders Agreement;
Upon the purchase of the shares owned by such Common Shareholder, he or she shall have no further interest in the property of Newco except as otherwise expressly provided in the Shareholders Agreement.

26. No shareholder shall be entitled to transfer his or her shares in Newco without first obtaining the approval of the board of directors of Newco.

27. Common Shareholders will have the option of providing XXXXXXXXXX as a Contracting Professional or by using a New Contracting Corporation.

28. The Common Shareholders who choose to provide XXXXXXXXXX using a New Contracting Corporation will be employed by his or her New Contracting Corporation under the terms of an employment agreement.

29. Each Common Shareholder shall be a Contracting Professional or an employee of his or her New Contracting Corporation.

30. Each Contracting Professional and Newco will enter into a Contract which will provide the following:

(a) A Contracting Professional will provide XXXXXXXXXX to Newco for Fees on either a fixed per diem or on a fee for service basis. The Fees will be based on the fair market value of the XXXXXXXXXX provided and will take into account the level of experience of the Contracting Professional and the level and type of XXXXXXXXXX to be provided.

(b) There will be a minimum number of work days per year that the Contracting Professional agrees to work.

(c) A Contracting Professional will invoice Newco on a regular basis, the invoiced amounts to be based on the number of days worked at the preliminary agreed upon fixed per diem rates or fee for service rates between the Contracting Professional and Newco. If the Contracting Professional provides more or less XXXXXXXXXX than that originally estimated, the Contracting Professional and Newco will adjust the Fees as required periodically throughout the year.

(d) Newco will provide the Contracting Professional with certain supplies, facilities and equipment required in the provision of XXXXXXXXXX by the Contracting Professional, but the fair market value of these items will be borne by the Contracting Professional and taken into account in the determination of the Fees. Further, each Contracting Professional will be responsible for all expenses incurred by it 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 XXXXXXXXXX from time to time;

(vi) expenditures on personal practice preferences of the Contracting Professional;

(vii) entertainment expenses connected to the business of the Contracting Professional;

(viii) the expense of professional development and courses; and

(ix) travel expenses, including motor vehicle, accommodation and meal expenses.

(e) So long as the Contracting Professional fully discharges his or her responsibilities under the Contract with Newco, there will not be any other agreement (oral or otherwise) that would prohibit or restrict the Contracting Professional from providing XXXXXXXXXX to other persons or that would otherwise prohibit or restrict the Contracting Professional from competing with Newco. For greater certainty, there will not be any terms in the Shareholders Agreement, or any other agreement (oral or otherwise) that would prohibit the Contracting Professional from competing with Newco in respect of the provision of XXXXXXXXXX.

(f) All payments from third parties in respect of XXXXXXXXXX provided by a Contracting Professional will be for the benefit of Newco and will be made directly to Newco or remitted to Newco if received by the Contracting Professional directly.

(g) A Contracting Professional will indemnify Newco and its directors, officers and employees from any and all claims resulting from the services provided by the Contracting Professional to Newco under the Contract.

31. A New Contracting Corporation will have the following attributes:

(a) It will hold a valid certificate of authorization issued by the XXXXXXXXXX.

(b) It will engage the Common Shareholder as an employee pursuant to a written employment contract.

(d) All of the voting shares will be legally and beneficially owned by the particular Common Shareholder.

(e) Only the particular Common Shareholder will provide XXXXXXXXXX to Newco through a New Contracting Corporation.

(f) Preference Shares may be held by the Common Shareholder's family, where family is defined as those individuals connected by blood relationship, marriage, common-law partnership or adoption, as those terms are defined in subsection 251(6) of the Act.

(g) All persons legally or beneficially owning shares of a Contracting Company will be residents of Canada.

(h) For greater certainty, Common Shares or Preference Shares will not be held by a trust, corporation or partnership but will be held by an individual only.

(i) A Common Shareholder cannot be an employee, officer, director or shareholder, legal or beneficial, of more than one New Contracting Corporation.

32. Each New Contracting Corporation will enter into a Contract with Newco to provide the latter with XXXXXXXXXX in return for Fees based on the fair market value of the XXXXXXXXXX provided. The Contract will also provide the following:

(a) New Contracting Corporation will provide XXXXXXXXXX to Newco for Fees, which will be either a fixed per diem or on a fee for service basis. The Fees will be negotiated with each New Contracting Corporation and will be based on the fair market value of the XXXXXXXXXX provided and may take into account the level of experience of the Common Shareholder of the New Contracting Corporation and the level and type of services to be provided. The Fees will not, in any way, be based on Newco's success in collecting the relevant billings generated by the New Contracting Corporation on Newco's behalf.

(b) The initial term of each Contract will terminate at the end of the first calendar year; thereafter, Contracts will be automatically and continuously renewed for XXXXXXXXXX-year terms, with any mutually agreed upon amendments, subject to the termination provisions.

(c) The requirements of a New Contracting Corporation will be mutually agreed upon between Newco and the New Contracting Corporation. Subject to the terms described in this letter, if a New Contracting Corporation provides no services to Newco, the New Contracting Corporation will not be paid.

(d) New Contracting Corporation will invoice Newco on a regular basis, the invoiced amounts to be based on the number of days worked at the preliminary agreed upon Fees. If the New Contracting Corporation provides more or less services than that originally estimated, the New Contracting Corporation and Newco will adjust the Fees as required periodically throughout the year.

(e) All payments from third parties in respect of services provided by New Contracting Corporation will be for the benefit of Newco and will be made directly to Newco or remitted to Newco if received by a New Contracting Corporation directly.

(f) Newco will provide each New Contracting Corporation with certain supplies, facilities and equipment required in the provision of XXXXXXXXXX by the New Contracting Corporation, but the fair market value of these items will be borne by the New Contracting Corporation and taken into account in the determination of the Fees. Further, each New Contracting Corporation will be responsible for all expenses incurred by it in respect of the following:

(i) professional membership fees and insurance;

(ii) continuing professional education for its employees;

(iii) transportation;

(iv) communication;

(v) maintaining the professional standards set by the XXXXXXXXXX from time to time;

(vi) expenditures on personal practice preferences of the Contracting Company;

(vii) entertainment expenses connected to the business of the Contracting Company;

(viii) the expense of professional development and courses for its employees; and

(ix) travel expenses, including motor vehicle, accommodation and meal expenses for its principal employees.

(g) So long as a New Contracting Corporation fully discharges its responsibilities under the Contract with Newco, there will not be any other agreement (oral or otherwise) that would prohibit or restrict a New Contracting Corporation from providing XXXXXXXXXX to other persons or that would otherwise prohibit or restrict a New Contracting Corporation from competing with Newco. For greater certainty, there will not be any terms in the Shareholders Agreement, or any other agreement (oral or otherwise) that would prohibit the New Contracting Corporation from competing with Newco in respect of the provision of XXXXXXXXXX.

(h) New Contracting Corporation and Newco may agree to suspend the Contract for a specified period of time. This provision could possibly be used where the Common Shareholder is on leave because of, amongst other things, he or she is disabled, or after the birth of a child.

(i) New Contracting Corporation or Newco may terminate the Contract at any time by providing notice to the other of not less than thirty days. If New Contracting Corporation or Newco materially breaches a term of the Contract, the other party may, in its sole discretion, terminate the Contract without notice.

(j) New Contracting Corporation will indemnify Newco and its directors, officers and employees from any and all claims resulting from the XXXXXXXXXX provided by New Contracting Corporation to Newco under the Contract.

33. Each Contracting Professional and/or Contracting Company will be responsible for and bear the risk of loss of income as a result of disability and will make their own arrangements in this regard.

34. Within 6 months of this ruling, the Named Partners will incorporate New Contracting Corporations and will elect to provide XXXXXXXXXX through such corporations.

Purpose of the Proposed Transactions

35. The purpose of the proposed transactions is to restructure the XXXXXXXXXX of the Partnership without adverse tax consequences. The current professional services of the XXXXXXXXXX will be provided through Newco, which will have the following advantages:

(a) eliminating joint and several liability inherent in providing professional services through a partnership, and

(b) providing each of the Named Partners with the opportunity to participate in the XXXXXXXXXX as a Contracting Professional or through a New Contracting Corporation and, as such, have increased control over his or her individual level of participation in the XXXXXXXXXX.

Rulings Provided

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes 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,

we rule as follows:

A. Subject to sections 18 and 67 of the Act, the Fees payable by Newco to New Contracting Corporations or Contracting Professionals 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 Named Partner would not, if his or her New Contracting Corporation did not exist, reasonably be regarded as an officer or employee of Newco in respect of the provision of XXXXXXXXXX, the Named Partner's New Contracting Corporation will not be considered to be carrying on a Personal Services Business.

C. Provided that Newco was not a member of a partnership in a particular taxation year and a particular New Contracting Corporation was not a member of a partnership in that same year, the income of Newco and the particular New Contracting Corporation for that taxation year will not be considered to be Specified Partnership Income.

D. The undertaking of the proposed transactions above, and in particular, the payment of the Fees by Newco to a New Contracting Corporation, will not, in and of themselves, cause subsections 56(2), 56(4) or 246(1) of the Act to apply so as to cause an amount received by the New Contracting Corporation under the Contract to be taxed in the hands of the Named Partner who is in the employ of his or her New Contracting Corporation.

E. The proposed transactions, in and of themselves, will not cause subsection 245(2) of the Act to apply to re-determine the tax consequences confirmed in the rulings given above.

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.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted any of the tax consequences relating to the facts and proposed transactions described above except as expressly stated in the rulings. In addition, nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to or accepted the fair market value or reasonableness of any amounts, including the Fees and the Property, as transferred from the Partnership to Newco.

Additional Comments

Whether or not a particular Common Shareholder would, if his or her New Contracting Corporation did not exist, be an employee of Newco or an independent contractor who has entered into a contract of services with Newco is a question of fact that can only be determined after a review of the actual agreements entered into between the particular New Contracting Corporation and Newco and between the particular New Contracting Corporation and the particular Common Shareholder. This review and determination is the responsibility of the particular Common Shareholder's local tax services office.

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 possible ownership of any shares of any New Contracting Corporation 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 New Contracting Corporation to a family member of the Common Shareholder. Also, section 120.4 of the Act may apply with respect to taxable dividends or trust income in respect of taxable dividends from a New Contracting Corporation received in a taxation year by a family member of the Common Shareholder who has not attained the age of 17 years before that year.

Opinion

1. 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 the New Contracting Corporations. In general, where a particular function of a professional partnership that was previously carried on by the partnership is subsequently carried on by the former partners, and no longer in partnership, for bona fide 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. However, based on the facts and proposed transactions described herein, it is our view that the incorporation of Newco will not, in and of itself, cause subsection 256(2.1) of the Act to be applicable to the New Contracting Corporations.

2. Consistent with paragraph 2 of Interpretation Bulletin IT-378R, Winding up of a Partnership, the issuance of the Preference Shares in the name of each Partner, instead of the Partnership, and the issuance of the Promissory Notes in the name of each Partner, instead of the Partnership, as described in paragraph 21 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 22 of Information Circular 70-6R5, the comments in the immediately preceding paragraph are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CRA.

Yours truly,

XXXXXXXXXX
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch