2016-0646411E5 Professional corporation & small business deduction

Principal Issues: Impact of 2016 Budget on partnership reorganization rulings

Position: See Below

Reasons: See proposed legislation in 2016 Budget and paragraph 16 of IC70-6R7.

Author: Moore, Gwen
Section: 125

XXXXXXXXXX                                                                                      2016-064641

May 6, 2016

Dear XXXXXXXXXX:

Re:  Small Business Deduction

We are writing in reply to your correspondence of May 4, 2016, with respect to partnership reorganizations. You have asked for our views as to the potential tax implications to a professional corporation’s eligibility to claim a small business deduction after the Federal Budget of March 22, 2016 (the “2016 Budget”).  You have also asked about the impact of the proposed changes to the small business deduction contained in the 2016 Budget on advance income tax rulings given before the 2016 Budget.

Our Comments

Professionals may provide their services through professional corporations, if provincial legislation and governing bodies permit this.  In some cases, professionals that carry on business as a partnership may provide their professional services to the partnership as employees of their professional corporation, which in turn are independent contractors to the partnership.  The professionals, in their capacity as partners, would continue to provide non-professional services (e.g. promotional, administrative and other services) to the partnership.  Under an alternative reorganization structure, the assets of the partnership may be acquired by a newly formed central corporation (“Newco”).  Similarly, the professionals may provide their professional services as employees of the professional corporations, which in turn are independent contractors to Newco.  The Canada Revenue Agency (“CRA”) was asked to provide advanced income tax rulings with respect to such arrangements.  The purpose of such rulings was to provide certainty of interpretation with respect to the small business deduction based on the existing legislation.

The 2016 Budget proposes to amend the Income Tax Act to address concerns about partnership and corporate structures that multiply access to the small business deduction. To address such tax planning, the 2016 Budget proposes to extend the specified partnership income rules to partnership structures in which a Canadian-controlled private corporation (“CCPC”) provides (directly or indirectly, in any manner whatever) services or property to a partnership during a taxation year of the CCPC where, at any time during the year, the CCPC or a shareholder of the CCPC is a member of the partnership or does not deal at arm’s length with a member of the partnership.  In the case of corporate structures, the 2016 Budget proposes new rules under which, in general, a CCPC’s active business income from providing services or property (directly or indirectly, in any manner whatever) in its taxation year to a private corporation will be ineligible for the small business deduction where, at any time during the year, the CCPC, one of its shareholders, or a person who does not deal at arm’s length with such a shareholder has a direct or indirect interest in the private corporation.  Under the proposals, both measures will apply to taxation years that begin after March 21, 2016.  For detailed information on these measures, we refer you to the 2016 Budget documents which are available on the Department of Finance Canada website at www.fin.gc.ca.

With respect to any advance income tax rulings involving such partnership reorganization structures as described above, given by the Canada Revenue Agency before the 2016 Budget, the policy in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations, would apply. In particular, paragraph 16 of IC70-6R7 states that “If legislation is amended after a Ruling is issued and the Ruling ceases to be supported by the legislation due to the amendment(s), the Ruling will cease to bind the CRA on the effective date of the amendment.” Therefore, in this case, any advance income tax rulings issued by the CRA will cease to bind the CRA on the coming into force of the proposed legislation.

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs 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 the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2016

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 redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, 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, 2016