It is our standard practice when incorporating a professional corporation (a PC) to prepare an employment contract between the professional and the PC.
The employment contract is usually signed by the professional both in his or her personal capacity and on behalf of the PC as its President. Given that the professional signs in both capacities — and is really the directing mind of both persons involved — it seems like an odd practice, but the fact is that the CRA expects to see a written agreement. See Interpretation Bulletin IT-189R2 especially paragraph 1(j), which says the following:
[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 … 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
See also CRA technical interpretation 2003-0030115 dated October 10, 2003, which summarizes the response to question 16 at the 2003 Table Ronde sur la Fiscalite Federale APFF.
This approach has been called “overly zealous” (see Colin Smith and John Loukidelis, “Professional Incorporations”, a paper presented at the Ontario Bar Association seminar “More Tax Issues You Cannot Afford to Miss”, Toronto, Ontario, November 22, 2005). I expect that a tax court would not insist on a written agreement as required by the CRA (unless, perhaps, the professional is purporting to assign amounts received to the PC eg where a doctor assigns OHIP billings to the PC). The fact remains, however, that auditors expect to see one (or so I’m told), and so, to avoid wasting time on a debate on the subject, we prepare the agreement.
