NO: IT-189R2
DATE: May 24, 1991
SUBJECT: INCOME TAX ACT
Corporations Used by Practising Members of Professions
REFERENCE: Sections 9 and 125 (also sections 10 and 34 and paragraph 18(1)(p))
Application
This bulletin cancels and replaces Interpretation Bulletin IT-189R dated February 27, 1984. Current revisions are indicated by vertical lines.
Summary
This bulletin deals with corporations used by practising members of professions, such as law, medicine, engineering, architecture or accounting. These practitioners may be employees of a corporation which they or their relatives own or control and which carries on the business of the professional practice. While the tax treatment of situations of this nature can only be determined after ascertaining all of the relevant facts of a given case, this bulletin discusses some of the applicable provisions of the Act and other general guidelines.
Discussion and Interpretation
Incorporated Professional Practices
1. A corporation may be recognized as carrying on a professional practice unless provincial law or the regulatory body for the particular profession provides that only individuals may practice the profession. If this first condition is met, a corporation is recognized as carrying on a professional practice if the activities of the corporation and its relationship to its employees and clients are similar to those ordinarily associated with a corporation carrying on a business. Such activities include:
(a) owning or renting the premises of the business,
(b) owning or renting the furniture, fixtures and major equipment of the business,
(c) operating a bank account in its own name through properly authorized signing officers,
(d) purchasing necessary supplies,
(e) providing clerical services,
(f) billing clients for professional services in its own name,
(g) depositing the collections in its bank,
(h) paying salaries to individuals performing the professional services offered by a corporation,
(i) making the clients aware that they are dealing with the corporation, and
(j) maintaining an employer-employee relationship between the corporation and the individual, with the services to be performed clearly set out in a dated, written agreement wherein specific provisions determine a reasonable salary for the services performed.
2. If provincial law or the regulatory body for the profession precludes the practice of the profession by a corporation, income derived from the profession will normally be considered to be earned by the individual who rendered such professional services and not by a corporation.
Work in Progress
3. A corporation that is carrying on the practice of a profession within the parameters of 2 above is required to determine its income on the accrual basis, except that it may qualify to make an election under section 34 not to include in its income any amount in respect of work in progress at the end of the year (see the current version of IT-457, Election by Professionals to Exclude Work in Progress from Income). This election may be made only in respect of a business that is the professional practice of an accountant, dentist, lawyer (including a notary in the province of Quebec), medical doctor, veterinarian or chiropractor. Except where a valid election has been made under section 34, work in progress is required to be valued at the year end and must be included in computing the income from the professional business (see the current version of IT-473, Inventory Valuation). Subsection 10(4) provides that for 1983 and subsequent taxation years, the fair market value of property that is work in progress of a business that is a profession means the amount that can reasonably be expected to become receivable for that work in progress after the end of the year.
Limits on Deductions By Professional Corporations
4. A Canadian-controlled private corporation (see the current version of IT- 458) which carries on a professional practice may be entitled to the small business deduction pursuant to subsection 125(1), provided certain conditions are met. However, to the extent that such a corporation derives its income for the year from carrying on a “personal services business” or a “specified investment business”, the small business deduction is not available. Furthermore, the deduction of expenses by a personal services business of a corporation is restricted to the narrow range of items described in paragraph
18(1)(p). Refer to the current version of IT-73 for a discussion of these topics in greater detail.
Ineffective Arrangements and Shams
5. In some cases, a corporation (or certain of its transactions and business arrangements) might not be constituted in a legally effective way. Furthermore, various acts and transactions (shams) might be engaged in with the intention of misleading outside parties, the Department or the courts as to the nature of the rights and obligations (if any) which the parties themselves actually intend to create. For example, the corporation might not in fact carry on the business operation, it might perform few or no services, its activities might consist of little more than a series of accounting entries in its books of account or its management agreement with the practitioner might not be complied with or might lack substance. In appropriate cases of this nature, the income purported to be that of the corporation can be taxed as income of the individual practitioners who have, in fact, carried on the business operation.