Arora Trading – Tax Court of Canada finds that a fake business could not be denied its small business deduction

Ms. Singh was a full-time employee doing administrative work for her husband’s gasoline products wholesaler (“Econo”). A new company was incorporated (“Arora”) at the end of 2008 that was 76% owned by her (so that it was not associated with Econo) and that started earning management fees from Econo. However, Ms. Singh, along with four other full-time employees of Econo, did not transfer over to Arora until the beginning of 2010, and Econo also hired a 6^th individual then as an independent contractor. CRA assessed both the 2009 and 2010 taxation years of Arora on the basis that it was carrying on a personal services business (PSB) – so that various expenses were denied under s. 18(1)(p) and Arora’s small business deduction claims for both years were denied.

Visser J found that Arora was carrying on a PSB in 2010 given that nothing much had changed from before its incorporation and given that the services of the 6^th individual (the independent contractor) could not be counted towards satisfying the “more than five full-time employees” test contained in the PSB definition. Although unclear, his reasoning suggests that the whole business of Arora (entailing six individuals’ activities) could have been tainted as a PSB on the basis only of the role of Ms. Singh.

However, he allowed Arora’s appeal for its 2009 year. Because it was not carrying on a business (Arora had no employees for its purported management business), it therefore could not be reassessed on the basis that it had a PSB. Although this sounds a bit like a taxpayer succeeding because its business was a sham, this probably is more a matter of CRA not minding the store – it likely should have assessed Econo for the income in question (e.g., denying the management fee deduction under s. 18(1)(a) or 67).

Neal Armstrong. Summary of Arora Trading Ltd. v. The Queen, 2019 TCC 98 under s. 125(7) - personal services business.