Tiessen Interior Design – Tax Court of Canada applies s. 256(2.1) to prevent a professional firm from multiplying the small business deduction
An incorporated firm of architects and interior designers restructured. Their practice was now carried on by a partnership between “Partnercos” owned by each of the principals. The principals were now exclusively employed by respective Servicecos controlled by them, which provided their services to the respective “paired” Partnerco for fees. These fees were deemed to be business income under s. 129(6). In their tax filings, each Serviceco treated itself as not being required to share the business limit with any other Serviceco - or with any Partnerco other than its paired Partnerco. As a result, the aggregate business limit claimed by the 15 Servicecos for their taxation years ending on January 1, 2013 was $4.6 million. CRA assessed on the basis that the Servicecos and Partnercos were associated with each other under the “one of the main reasons” test in s. 256(2.1), so that this multiplication of the business limit for small business deduction purposes was nullified.
Monaghan J confirmed these assessments (partly in light of a non-privileged presentation and spreadsheet provided at the planning stages by the tax advisor), stating:
Multiplication of the SBD was the reason the Reorganization was proposed and the resulting tax savings presented to the Principals led to the decision to undertake the Reorganization. Most of the reasons advanced by the Appellants for reorganizing were not convincing as main reasons. … They constitute benefits that the Principals enjoyed, to varying degrees, as a result of the Reorganization, but I have no doubt reduction of taxes was one of the main reasons for it.
Neal Armstrong. Summary of Nicole L. Tiessen Interior Design Ltd. v. The Queen, 2021 TCC 29 under s. 256(2.1).