2 December 2019 CTF Conference - Paul Wilson in "New Taxation Rules for Private Corporations: So far, so reasonable?" under “Scenario 2”

Paul Wilson (Director, Medium Business Audit Division, Small and Medium Enterprises Directorate) provided comments noted below on the following scenarios:

Scenario 1 - Corporate income derived from GIC

A corporation that holds $1 million of GIC’s is owned by 4 shareholders who are siblings. The shareholders vary in age between 30 and 55. The GIC’s are held for a one year term and renew automatically each year. The company earns $50,000 of interest income annually. The shareholders’ only involvement with the company is to meet once a year to decide on the quantum of dividends to be paid out to the shareholders in the fiscal year.

Mr. Wilson commented that, based on prior rulings and the 2018 STEP Roundtable, the Directorate’s auditors would simply consider the income to be from property, given that the only activity was passive income generation from the GIC. Thus, the excluded share exemption would not be met, but there would be no business. (It is also unlikely that an auditor would forward this matter to Headquarters to begin with.)

Scenario 2 - Corporate income derived from 3rd-party managed investments

A corporation that holds $5 million in portfolio investments is owned by 4 shareholders who are siblings. The shareholders range in age from 30 and 55. The portfolio is professionally managed by a third party investment manager and earns $500,000 of dividend income annually. The shareholders meet with the investment manager once a quarter to review the investment strategy and also meet once a year to decide on the quantum of dividends to be paid out in the fiscal year.

Mr. Wilson noted that although the interest would probably be income from property, as for the dividend income, given that the Rulings Directorate and the courts have indicated a very low threshold for when a corporation has a business, the corporation would likely be considered to have a business.

Paul Wilson (Director, Medium Business Audit Division, Small and Medium Enterprises Directorate) provided comments noted below on the following scenarios:

Scenario 3 - Car rental business

Company A is a car dealership. It owns its vehicles, and the majority of its revenue is from selling them. If Company B instead leases its vehicles, is it engaged in the provision of services?

Mr. Wilson indicated “no” – but noted that the conclusion changes if Company B does not own its own vehicles, but is acting instead as a broker.

Scenario 4 - Insurance broker

An insurance brokerage sells insurance products on its website. Is it engaged in the provision of services?

Mr. Wilson indicated that it would be necessary for the auditor to first understand the legal relationship amongst the parties, but noted that 8 May 2018 CALU Roundtable Q. 6, 2018-0745871C6 indicated that insurance generally is a service.

Scenario 5 - Hotel with no guest services

A corporation operates a hotel. It was started by two spouses who each own 50% of the voting shares of the corporation. There are no restaurant operations in the business and the only income is from the hotel-related room revenue.

Mr. Wilson indicated that although common sense dictates that hotels provide a service, here the hotel is only engaged in renting rooms. Rulings needs to be consulted on this because of inter alia the interplay with the specified investment business provisions and the small business deduction. Hopefully, an answer will be posted soon.

Scenario 6 - Landscaping business sells sod

Example 4 on CRA’s webpage entitled “Tax on split income – Excluded shares” indicated that a cleaning business that spends 15% of its revenue on cleaning products is nevertheless engaged only in cleaning services, because the supply of cleaning products is incidental to the services, whereas Example 6 found that construction materials qualified as a non-service component of a construction business.

How would a landscaping business, which generates income from cutting grass, fertilizing, and sodding – which entails buying sod – be treated?

Mr. Wilson indicated that in Example 6, what was highlighted was that there was the sale of a good (the deck) but that even within it, it was necessary to divide into parts and labour, where the labour is analogous to service income.

In the case of the landscaping business, the conclusion likely would be reached that the landscaping business was for the provision of a service.