Law Professional Corporations – Rights to Invoice
Aitchison Professional Corporation v. The Queen, 2016 TCC 281
This was a Rule 58 application (that was not granted). The application of Rule 58 to the facts are not novel. What is interesting about this case is the effect the outcome could have on professional corporations whose shareholders are related.
NOTE: The author hopes that this matter will not settle and will proceed to trial. The ambiguity resulting from not having this matter settled would introduce significant risk for professional corporations.
The CRA issued re-assessments under Income Tax Act, s 160, claiming that the property transferred was the “right to invoice” for legal services.
In this case, the shareholders of the professional corporation were related and all were licensed to practice law in Ontario. During the period in question one shareholder had significant personal tax debt. During the period, none of the shareholders were paid a salary, and no dividends were paid to the tax-debtor-shareholder despite significant billings of the corporation connected with legal services provided by that shareholder.
Two legal questions, framed by the taxpayer were:
- is there an innate right to invoice of any lawyer who renders services through a professional corporation; and if so
- can such a right be transferred.
The Court held that the issue raised is novel and complex, and must be determined with the benefit of a full trial so as to serve the interest of justice and the possibility of establishing precedent (paras 20 and 22).
Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
If you like this website, please share it with others.
Back To Top OR Home
Mr Jean-Pierre Laprote asked: Sas: what would be the caution you would give to incorporated professionals in relation to this case?
REPLY
I see there being many ways this decision can go, if it even comes before a judge at trial. I think the concern (from a tax policy perspective), and see this concern become more widely shared by lawmakers and voters alike, is the artificiality of the relationship that depends on its viability on common financial interest (family members) rather than arm’s length dealings. Although this case, on its face, appears to involve family member shareholders of the PC who contribute to the income of the PC, and the issue is no return of any kind to a tax debtor, the outcomes may be much broader. For example, what is the economic reality behind a professional corporation having a spouse and children as shareholders who do not contribute to the success of the business in a meaningful way? Why should tax law facilitate income splitting among family members in a way that doesn’t support economic/public growth? The issues can be lengthy and arguments exist for the multiple positions
As for cautions – I would suggest that there needs to be a defensible (and not just on a legally possible rationalization basis) relationship between the rights disposed to a PC and the remuneration structure of the professional. This is not an issue where the PC has a sole shareholder or the shareholders are not related (rare). There should also be a defensible relationship between other shareholders and the business of the corporation (why do businesses take on shareholders and is this the case here). I think that the move away from the almost gratuitous acceptance of income splitting benefits through PCs will be slow, but I see it as inevitable, particularly since the income splitting use is so far from the justifications offered and accepted in support of allowing professionals to operate through PCs in the first place.