Introduction

When a law partnership or LLP admits a new partner who already operates through a professional corporation, the income flow between the individual partner, the professional corporation, and the firm requires careful structuring. The partnership pays the partner; the partner may then direct some or all of that income to the professional corporation — but the mechanism matters.

Scenario: Glenmore LLP Admits Yasmin, Who Has an Existing MPC

Glenmore LLP is a ten-partner litigation boutique. It admits Yasmin as a new partner. Yasmin has operated through a professional law corporation for six years — she is accustomed to the income being paid to her corporation.

Glenmore pays its partners through quarterly distributions based on their share of firm income. The question is: can Glenmore pay Yasmin's distributions directly to her professional corporation?

The Issue: Who Is the Partner?

In a law partnership or LLP, the partners are individuals — the partnership agreement is between persons, and professional regulatory rules in Ontario require that it is the individual lawyer who is the partner, not a corporation. The professional corporation is not a partner; Yasmin is.

The LSO's rules permit incorporated lawyers to practise through their professional corporation — but the professional corporation does not replace the individual as a partner in an LLP. The partnership distributes income to Yasmin personally as a partner.

The flow:

Glenmore distributes partnership income to Yasmin personally.

Yasmin then decides how much to retain personally and how much to transfer to her professional corporation.

The transfer to the professional corporation must be structured correctly. A simple cash transfer from Yasmin's personal account to the corporation is not necessarily a legitimate income shift — the CRA requires that the corporation be providing services to earn the corporate income, not simply receiving a transfer of personal income.

The Services Agreement Structure

The proper structure: Yasmin's professional corporation provides legal services to the partnership through a management or services agreement. The partnership pays Yasmin personally for her work (the partnership entitlement), and separately pays her professional corporation for defined services — administrative, file management, or other specifically documented services the corporation provides.

Alternatively, the professional corporation may hold an economic interest arrangement with the partnership — subject to LSO rules — that allows it to receive a portion of the income flow on a documented basis.

The specific structure must be reviewed by both a CPA and a lawyer who understands the LSO's professional corporation rules.

The HST Question

Where the professional corporation provides services to the partnership, those services are taxable supplies. The professional corporation should be charging HST on the management fee or services fee it invoices to the partnership.

The Partnership T5013 and the Corporation's T2

The partnership issues Yasmin a T5013 reflecting her share of partnership income. This T5013 income is personal income for Yasmin — it is not corporate income of her professional corporation. The T5013 amounts are reported on Yasmin's personal T1, not on the professional corporation's T2.

Any amounts that Yasmin earns through the services agreement between her corporation and the partnership are corporate income — reported on the professional corporation's T2.

When to Speak With a CPA

Before admitting an already-incorporated lawyer as a partner — and before structuring the income flow from the partnership to the partner's professional corporation — both a CPA and a lawyer who understands the regulatory constraints should be engaged. The structure must be compliant with both the LSO's rules and the Income Tax Act's attribution provisions.

Rotaru CPA works with law firm partners on professional corporation income structuring and partnership tax. Book a consultation to review an incoming partner's corporate structure.