An Overview of Cost-Sharing Agreements
We often see professionals, like doctors, dentists, or accountants, come together with their own independent practices to form partnerships and corporations to share costs and manage their affairs. If you’re considering coming together to help reduce certain costs, but want to maintain independence and autonomy with your own practice, you may instead be better off considering a cost-sharing agreement.
What is a Cost-Sharing Agreement?
Put simply, a cost-sharing agreement is a way to deal with the more expensive operating costs your business might have to deal with, like leases, equipment, and common employees. This allows smaller practices that would not normally have access to high value real estate or expensive and sparingly used equipment, to pool some of their money and get that access. Unlike with a corporation or a partnership, the parties to a cost-sharing agreement have no say in the management of each other’s practices.
Benefits of Cost-Sharing
Outside of the ability to access higher value premises and equipment, there are certain tax benefits that can attach to a cost-sharing agreement. Because the agreement would keep each professional’s corporation at arm’s length from one another, each corporation will have access to the full small business deduction. In a partnership or management corporation arrangement, the small business deduction is shared across all the professional corporations, so each participant has a much lower deduction to work with. There are also certain HST benefits to operating in cost-sharing agreement, provided one of the participants is made the HST agent for the group. For more information on tax savings and benefits, please consult with your accountant.
Challenges of Cost-Sharing
It is important in setting up a cost-sharing agreement to pay careful attention to how the agreement is drafted. The CRA will look closely at these types of arrangements to ensure that they are not operating as partnerships. Provided that the cost-sharing group is not sharing in profits and losses, does not have central management of the individual practices, and the equipment is not jointly owned, it is unlikely that the CRA will classify it as a partnership. Having the equipment in the name of only one party does not prevent the other parties from using or providing money for the use of the equipment, but the equipment cannot be jointly owned.
There are also certain issues around employment that parties need to be aware of when setting things up. If the cost-sharing group intends to have common employees, best practice is to appoint a single participant to employ the common employees and have the rest of the group indemnify the appointee for their portion of the costs associated with the common employees.
Is Cost-Sharing Right for Me?
If you’re interested in coming together with other professionals to save some cash, but don’t want to give up control over your practice, cost-sharing is probably the best avenue for you. As with all forms of organization there are challenges that need to be addressed, however the advantages of a cost-sharing arrangement in terms of autonomy and tax benefits can outweigh these challenges.
If you are interested in exploring cost-sharing agreements and other organizational options, please do not hesitate to contact me or any other member of our business law group.
Associate – Business Law Group
Disclaimer: This article is provided as an information resource. This article should not be relied upon to make decisions and is not intended to replace advice from a qualified legal professional. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. Please note that this information is current only to the date of posting. The law is constantly changing and always evolving.