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Common Law & Same Sex Partnerships: How Familial Relationships May Impact Financial Planning for Dentists and Physicians
Since January 1, 2006, the Ontario Business Corporations Act (“OBCA”) has permitted “family members” of physicians or dentists to hold non-voting shares issued by medicine or dentistry professional corporations.
The OBCA defines “family member”, in relation to a dentist or physician, as being the “spouse, child or parent” of the dentist or physician.
By issuing non-voting shares to family members, physicians and dentists may “income split” with family members through the distribution of corporate dividends to the non-voting shareholders. Income splitting is a tax planning tool derived from transferring income from a higher income earner in a household to lower income earners. The objective is to generate tax savings by having income taxed at lower marginal tax rates.
Dividends allocated to lower-income family members are subject to tax at lower marginal tax rates, effectively decreasing the family’s collective tax burden by re- directing income away from the professional’s higher marginal tax rate to a family member’s lower marginal tax rate.
With those tax savings in mind, incorporated physicians and dentists are often eager to know who may qualify as a “spouse, child or parent” shareholder. We are frequently asked whether the term “child” includes adopted children, step-children, or children from a common-law relationship. Similarly, many professionals wonder if their in- laws are eligible to hold shares of a professional corporation as “parents”.
Another common source of confusion is whether same sex partners or unmarried cohabiting partners qualify as “spouses” for purposes of identifying potential “family member” shareholders. This question appears to result from the common misconception that a physician or dentist must be legally married to a person before that person becomes a “spouse”, which is certainly not the case.
The term “spouse” has many different legal meanings, depending on the context involved and the legislation that applies to the particular issue at hand. Where dentistry and medicine professional corporations are concerned, the OBCA defines the term “spouse” in relation to a dentist or physician as being: “a person to whom the person is married, or with whom the person is living in a conjugal relationship outside marriage”.
Unfortunately, the phrase “living in a conjugal relationship” is not defined in the OBCA, and “conjugal relationship” is a concept more often associated with family law matters rather than business ventures.
Whether or not two people are living in a “conjugal relationship” is a question of fact, and the factors that courts will most often consider include: living arrangements, exclusivity, level of intimacy, performance of household chores, community attitude and conduct, financial interdependence, and attitude and conduct towards children (if any).1 These elements may be present in varying degrees and not all are necessary for the relationship to be considered a “conjugal relationship”.2 Importantly, the Supreme Court of Canada3 has also ruled that it is possible to live in a conjugal relationship without the partners having sexual relations, and that the term “spouse” cannot be restricted to heterosexual couples.
Therefore, and contrary to popular belief, unmarried physicians and dentists who are living in a conjugal relationship are entitled to cause their professional corporations to issue shares to their conjugal partners, including same sex partners.
Because a conjugal relationship means interdependency, mutual commitment and exclusivity, such a relationship obviously cannot be established immediately when two people meet. A conjugal relationship builds over a period of time, but how much time? What if the physician or dentist has been living in a conjugal relationship for a month, or two or three? At what point in time does their partner fulfill the definition of a “spouse” under the OBCA?
The OBCA understandably offers no guidance on this question – its primary focus is the regulation of business corporations in Ontario, rather than family law matters. But when a statute like the OBCA is ambiguous on point, we may look to other statutes having similar subject matter to serve as an interpretive aid to resolve ambiguity. In this case, the federal Income Tax Act defines an unmarried common law partner for tax purposes as a taxpayer who cohabitates in a conjugal relationship with someone who is the parent of their child and, if there are no children involved, the taxpayer has cohabited in a conjugal relationship for a continuous period of at least one year.
Therefore, if a physician or dentist must report himself or herself as a common law partner for tax purposes as a result of cohabiting in a conjugal relationship with a person for a period of one year (or having a child with that person), then it’s probably reasonable to conclude that the physician or dentist is also a “spouse” of that person for purposes of complying with the OBCA’s shareholder restrictions applicable to professional corporations.
Although the facts of each situation must be assessed individually, unmarried dentists and physicians who have combined their lives with another person (regardless of sex) in such a way that includes some or all of the characteristics of a conjugal relationship are encouraged to contact their professional advisors to discuss whether they should consider causing shares of a professional corporation to be issued to their “spouse”, thereby opening the door to the tax advantages offered through splitting income with their conjugal partners.
1 See Molodowich v. Penttinen (1980), 17 R.F.L. (3d) 376, at 381-382 (Ont. Dist. Ct.).
2 See M. v. H., 1999 SCC.