O’Connor
J.T.C.C.:—These
appeals
were
heard
in
Ottawa,
Ontario
on
April
14,
1994
pursuant
to
the
General
Procedure
of
this
Court.
The
appellant,
who
earlier
had
been
represented
by
counsel
in
these
appeals
was
no
longer
so
represented.
At
the
outset
of
the
hearing
an
application
was
made
on
behalf
of
the
appellant
pursuant
to
subrule
30(2)
requesting
that
it
be
allowed
to
be
represented
by
one
of
its
officers,
Christopher
Healy.
The
Court
having
given
consideration
to
the
circumstances
which
supported
this
application
granted
leave
to
be
so
represented.
Issue
The
periods
in
question
are
the
appellant’s
fiscal
years
ended
April
30,
1987
and
April
30,
1988
and
the
sole
issue
is
whether
the
appellant
during
those
years
was
a
personal
services
business
within
the
meaning
of
paragraph
125(7)(d)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
If
it
was,
then
the
assessments
by
the
Minister
of
National
Revenue
("Minister")
disallowing
expenses
of
$2,804
in
1987
and
$12,785
in
1988
were
properly
disallowed
pursuant
to
paragraph
18(1
)(p)
of
the
Act
and
further
the
appellant
was
not
entitled
to
the
small
business
deduction
provided
for
in
subsection
125(1)
of
the
Act.
The
relevant
provisions
of
the
Act
are
125(1),
125(7)(a)
to
(d),
248(1)
re:
definitions
of
“employee”,
"office"
and
“specified
shareholder”
and
paragraph
18(1
)(p)
which,
so
far
as
material,
read
as
follows:
125(1)
There
may
be
deducted
from
the
tax
otherwise
payable
under
this
Part
for
a
taxation
year
by
a
corporation
that
was,
throughout
the
year,
a
Canadian-controlled
private
corporation,
an
amount
equal
to
20
per
cent
of
the
least
of
(a)
the
amount,
if
any,
by
which
the
aggregate
of
(i)
the
aggregate
of
all
amounts
each
of
which
is
the
income
of
the
corporation
for
the
year
from
an
active
business
carried
on
in
Canada
.
.
.
and
exceeds
the
aggregate
of
(iii)
the
aggregate
of
all
amounts
each
of
which
is
a
loss
of
the
corporation
for
the
year
from
an
active
business
carried
on
in
Canada
.
.
.
(b)
.
.
.
and
(c)
the
corporations
business
limit
for
the
year.
125(7)
In
this
section,
(a)
"active
business
carried
on
by
a
corporation"
means
any
business
carried
on
by
the
corporation
other
than
a
specified
investment
business
or
a
personal
services
business
and
includes
an
adventure
or
concern
in
the
nature
of
trade;
(b)
“Canadian-controlled
private
corporation”
means
a
private
corporation
that
is
a
Canadian
corporation
other
than
a
corporation
controlled,
directly
or
indirectly
in
any
manner
whatever,
by
one
or
more
non-resident
persons,
by
one
or
more
public
corporations
(other
than
a
prescribed
venture
capital
corporation)
or
by
any
combination
thereof;
(c)
“income
of
the
corporation
for
the
year
from
an
active
business”
means
the
income
of
the
corporation
for
the
year
from
an
active
business
carried
on
by
it
including
any
income
for
the
year
pertaining
to
or
incident
to
that
business,
but
does
not
include
income
for
the
year
from
a
source
in
Canada
that
is
a
property
(within
the
meaning
assigned
by
subsection
129(4.1));
(d)
“personal
services
business”
carried
on
by
a
corporation
in
a
taxation
year
means
a
business
of
providing
services
where
(i)
an
individual
who
performs
services
on
behalf
of
the
corporation
(in
this
paragraph
and
paragraph
18(1)(p)
referred
to
as
an
“incorporated
employee”),
or
(ii)
any
person
related
to
the
incorporated
employee
is
a
specified
shareholder
of
the
corporation
and
the
incorporated
employee
would
reasonably
be
regarded
as
an
officer
or
employee
of
the
person
or
partnership
to
whom
or
to
which
the
services
were
provided
but
for
the
existence
of
the
corporation,
unless
(iii)
the
corporation
employs
in
the
business
throughout
the
year
more
than
five
full-time
employees,
or
(iv)
the
amount
paid
or
payable
to
the
corporation
in
the
year
for
the
services
is
received
or
receivable
by
it
from
a
corporation
with
which
it
was
associated
in
the
year;
248(1)
“employee”
includes
officer;
“office”
means
the
position
of
an
individual
entitling
him
to
a
fixed
or
ascertainable
stipend
or
remuneration
and
includes
.
.
.
the
position
of
a
corporation
director;
and
"officer"
means
a
person
holding
such
an
office;
“specified
shareholder”
of
a
corporation
in
a
taxation
year
means
a
taxpayer
who
owns,
directly
or
indirectly,
at
any
time
in
theyear,
not
less
than
ten
per
cent
of
the
issued
shares
of
any
class
of
the
capital
stock
of
the
corporation
or
of
any
other
corporation
that
is
related
to
the
corporation
and
for
the
purposes
of
this
definition,
18(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of.
.
.
(p)
an
outlay
or
expense
to
the
extent
that
it
was
made
or
incurred
by
a
corporation
in
a
taxation
year
for
the
purpose
of
gaining
or
producing
income
from
a
personal
services
business
(within
the
meaning
assigned
by
paragraph
125(7)(d)),
other
than
(i)
the
salary,
wages
or
other
remuneration
paid
in
the
year
to
an
incorporated
employee
of
the
corporation,
(ii)
the
cost
to
the
corporation
of
any
benefit
or
allowance
provided
to
an
incorporated
employee
in
the
year,
(iii)
any
amount
expended
by
the
corporation
in
connection
with
the
selling
of
property
or
the
negotiating
contracts
by
the
corporation
if
the
amount
would
have
been
deductible
in
computing
the
income
of
an
incorporated
employee
for
a
taxation
year
from
an
office
or
employment
if
the
amount
had
been
expended
by
the
incorporated
employee
under
a
contract
of
employment
that
required
him
to
pay
the
amount,
ana
(iv)
any
amount
paid
by
the
corporation
in
the
year
as
or
on
account
of
legal
expenses
incurred
by
it
in
collecting
amounts
owing
to
it
on
account
of
services
rendered
that
would,
if
the
income
of
the
corporation
were
from
a
business
other
than
a
personal
services
business,
be
deductible
in
computing
its
income;
Facts
The
essential
facts
are
as
follows.
In
1983
Network
W/P
Personnel
Inc.
(for
convenience
hereinafter
called
"Healy
Holdings”)
was
incorporated
under
the
laws
of
Ontario.
Christopher
Healy
(“Mr.
Healy”)
was
its
sole
shareholder.
In
1985
the
name
of
the
company
was
changed
to
Christopher
Healy
Holdings
Ltd.
and
in
1989
its
name
was
further
changed
to
Healy
Financial
Corporation.
This
company
is
the
appellant
in
these
appeals.
In
April
1986
another
corporation,
Network
Personnel
Inc.
("Network")
was
incorporated
under
the
laws
of
Ontario.
Its
shares
were
held
50
per
cent
by
Healy
Holdings,
which
was
wholly
owned
by
Mr.
Healy
and
50
per
cent
by
Ronald
Weber
Holdings
Ltd.
("Weber
Holdings")
wholly
owned
by
Ron
Weber
("Mr.
Weber").
Mr.
Weber,
who
was
a
friend
of
Mr.
Healy,
late
in
1985
had
left
his
former
employer
intending
to
set
up
his
own
business
inthe
personnel
services
area.
This
would
have
made
him
a
competitor
of
the
appellant.
In
1986
Mr.
Healy
persuaded
Mr.
Weber
to
join
forces
rather
than
compete.
This
was
achieved
by
the
incorporation
of
Network
and
the
50/50
shareholding
described
above.
Network
purchased
the
business
undertaking
of
Healy
Holdings.
An
agreement
("agreement")
was
executed
in
1986
by
the
two
holding
companies,
by
Mr.
Healy
and
Mr.
Weber
and
by
Network.
The
agreement
contained
restrictions
on
transfers
of
shares
of
Network
and
many
provisions
as
to
how
the
affairs
of
Network
were
to
be
conducted
and
as
to
the
respective
obligations
of
the
parties.
Sections
16,
17,
18
and
21
of
the
agreement,
which
is
found
at
Tab
10
of
Exhibit
A-1
read
as
follows:
16.
It
is
agreed
that
until
such
time
as
the
parties
hereto
shall
unanimously
decide
otherwise
the
day
to
day
control
and
operation
of
the
company
(Network)
shall
be
the
responsibility
of
all
of
the
individual
parties
hereto.
17.
It
is
agreed
that
all
profits
earned
by
NETWORK
will
be
allocated
as
follows:
(a)
Zero
to
$120,000
to
Healy
Holdings
(b)
$120,001
and
over
—
50
per
cent
to
Healy
Holdings
and
50
per
cent
to
Weber
Holdings.
For
the
purposes
of
this
agreement,
profit
will
be
defined
as
a
sum
remaining
after
deducting
from
all
revenues
received
by
NETWORK
in
the
fiscal
year
after
deducting
therefrom
all
operating
expenses
including,
but
without
limiting
the
generality
of
the
foregoing,
all
legal
accounting,
automobile,
promotion
and
corporate
tax
expenses.
For
greater
certainty,
the
parties
intend
“profit”
to
mean
after
tax
paid
monies
remaining
in
the
corporation.
18.
It
is
further
agreed
that
NETWORK
shall
pay
to
HEALY
HOLDINGS
the
sum
of
$6,000
per
month
together
with
approved
and
agreed
upon
automobile
and
promotional
expenses
for
the
services
to
(sic)
HEALY.
It
is
further
agreed
that
NETWORK
shall
pay
to
WEBER
HOLDINGS
the
sum
of
$4,000
per
month
together
with
approved
and
agreed
upon
automobile
and
promotional
expenses
for
the
services
of
WEBER.
21.
The
parties
acknowledge
and
agree
that
the
services
of
HEALY
and
WEBER
who
shall
devote
their
full
time,
care
and
attention
to
the
management,
operation
and
promotion
of
NETWORK
are
required
on
a
full
time
basis.
In
the
event
that
either
HEALY
or
WEBER
desires
to
terminate
his
full
time
services
to
NETWORK
then
the
terms
and
conditions
of
such
termination
shall
be
as
follows:
(a)
A
notice
of
intention
to
terminate
shall
be
given
to
NETWORK
not
less
than
ninety
(90)
days
in
advance
of
the
last
day
upon
which
the
services
of
either
HEALY
or
WEBER
will
be
rendered;
(b)
During
the
notice
period
the
departing
party
shall
not
engage
in
any
business
activity
either
directly
or
indirectly
in
any
area
in
which
NETWORK
is
engaged.
For
greater
certainty,
the
parties
intend
that
no
preparation
be
made
by
the
departing
party
during
the
notice
period
to
compete
with
NETWORK
but
following
the
notice
period
the
departing
party
may
enter
into
competition
with
NETWORK;
(c)
The
departing
party
shall
be
obliged
to
sell
his
shares
which
shall
for
the
purpose
of
this
agreement
include
the
shares
of
his
holding
company
and
shall
offer
for
sale
the
shares
to
the
remaining
shareholder
in
accordance
with
the
provisions
of
paragraph
2(i).
In
the
event
that
the
remaining
party
does
not
wish
to
proceed
with
the
purchase
of
the
shares,
the
departing
party
shall
be
obliged
to
purchase
the
remaining
parties
shares
including
the
shares
of
his
holding
company
under
the
same
terms
and
conditions.
Although
the
agreement
is
not
dated
testimony
reveals
that
it
was
actually
signed
on
June
2,
1986.
The
evidence
reveals
that
the
agreement
was
certainly
not
dictated
by
Mr.
Healy
or
Healy
Holdings
but
rather
had
been
negotiated
between
Mr.
Healy
and
Mr.
Weber
with
the
assistance
of
legal
counsel
and
eventually
concluded.
Mr.
Weber
testified
that
the
contribution
and
involvement
of
Mr.
Healy
and
Healy
Holdings
to
and
in
the
operations
of
Network
were
essentially
as
follows.
Firstly,
Mr.
Healy
had
no
office
at
the
premises
of
Network.
As
to
the
management
and
administration
of
Network
Mr.
Healy
only
contributed
about
two
hours
per
week.
However
in
the
years
1986,
1987
and
1988
Mr.
Healy
was
considerably
involved
in
setting
up
a
computer
system
for
Network
and
to
tn
is
end
spent
at
first
six
months
in
each
year
declining
later
to
four
months.
It
was
also
the
testimony
of
Messrs.
Weber
and
Healy
that
Mr.
Healy
was
involved
in
many
other
projects
and
essentially
left
the
day
to
day
management
and
administration
of
Network
to
Mr.
Weber.
Testimony
was
also
given
by
J.
Brian
Scott,
a
chartered
accountant
who
was
closely
involved
in
the
affairs
of
Messrs.
Weber
and
Healy
and
their
companies
and
who
in
fact
prepared
the
income
tax
returns
for
Network
for
the
years
in
Question
as
well
as
other
income
tax
returns
for
the
group.
This
witness
testified
that
Mr.
Healy
received
no
fixed
salary
from
Network
But
rather
was
entitled
to
the
fees
and
other
remuneration
provided
for
in
the
agreement.
Sometime
in
1986
Mr.
Healy
advised
Mr.
Weber
that
he
wanted
to
"spread
his
wings"
and
be
relieved
of
his
obligations
as
contemplated
in
section
21
of
the
agreement.
Section
21
of
the
agreement
was
not
strictly
complied
with
however
as
the
two
simply
had
a
meeting
and
discussed
it
and
Mr.
Weber
agreed.
This
allowed
Mr.
Healy
to
pursue
his
many
other
interests
as
described
below.
Mr.
Healy,
after
being
sworn
in
as
a
witness,
testified
as
to
the
many
other
pursuits
he
was
following
in
the
year
1987.
In
1987
he
set
up
a
company
called
Artemp
Personnel
Services
Inc.
Further,
early
in
1987
he
acquired
100
per
cent
of
the
shares
of
a
company
called
Action
Personnel
and
late
in
1987
acquired
100
per
cent
of
the
shares
of
Perma-Temp.
In
1987
he
also
became
involved
in
real
estate
and
acquired
in
partnership
with
two
other
persons
vacant
land
near
the
Byward
Market
in
Ottawa.
He
conducted
negotiations
with
the
city
as
to
the
rezoning
of
this
land.
Eventually
the
city
put
a
freeze
on
rezoning
in
the
area
and
this
project
did
not
proceed
as
contemplated.
In
fact
the
City
of
Ottawa
later
purchased
the
property
from
Mr.
Healy
and
his
partners.
Healy
during
the
1986
to
1989
period
had
become
extremely
interested
in
information
technology
and
its
application
in
the
personnel
services
field.
He
developed
a
software
program
which
eventually
was
sold
to
nine
personnel
agencies
over
the
years
1987
to
1989.
One
of
the
acquirers
of
this
technology
was
Network.
The
overall
picture
that
emerges
is
that
Mr.
Weber
was
left
to
run
Network
while
Mr.
Healy
pursued
other
interests.
His
principal
involvement
with
Network
during
the
years
in
question
was
the
development
and
installation
over
a
period
of
time
of
the
technology
mentioned
above.
However,
during
the
years
under
appeal
Mr.
Healy
remained
an
officer
and
a
director
of
Network.
This
he
explained
was
to
protect
his
financial
interest
in
Network.
Analysis
It
is
clear
that
many
of
the
indices
of
a
personal
services
business
were
in
place
in
the
years
in
question
namely,
1.
Mr.
Healy
owned
more
than
ten
per
cent
of
the
shares
of
the
appellant
and
thus
was
a
specified
shareholder;
2.
Mr.
Healy
performed
certain
services
on
behalf
of
the
appellant
for
Network;
3.
Mr.
Healy
was
president
and
a
director
of
Network;
and
4.
The
appellant
employed
less
than
five
full-time
employees.
In
argument
counsel
for
the
respondent
referred
to
Vern
Krishna,
Title
76,
Income
Tax,
numbers
2128
to
2132
which
read
as
follows:
2128
We
have
seen
that
employment
income
is
taxed
at
progressive
marginal
rates
and
business
income
earned
by
a
corporation
is
taxed
at
a
flat
rate.
Since
the
corporate
tax
rate
applied
to
active
business
income
earned
by
a
Canadian-controlled
private
corporation
is
approximately
23
per
cent,
there
can
be
considerable
advantage
in
converting
employment
income
(which
can
be
taxed
as
high
as
53
per
cent)
into
business
income.
2129
The
most
common
technique
of
converting
employment
income
into
business
income
was
to
use
a
corporation
to
render
personal
services.
For
example,
X,
an
employee
of
Opco
Ltd.,
might
incorporate
Newco
to
render
services
to
Opco.
In
Sazio,
the
taxpayer,
a
football
coach,
persuaded
his
football
club
to
hire
his
personal
corporation
to
provide
the
club
with
coaching
services,
which
he
had
previously
provided
directly
to
the
club.
The
fees
paid
to
the
corporation
were
then
taxed
as
business,
instead
of
employment,
income.
2130
To
discourage
these
types
of
arrangements,
“personal
services
business
income"
("PSBI")
is
taxed
on
a
gross
income
basis,
with
only
minimal
deductions.
PSBI
is
taxed
on
the
same
basis
as
employment
income,
and
is
not
eligible
for
the
small
business
deduction.
2131
A
personal
services
business
is
a
business
where
a
major
shareholder
of
a
corporation
provides
services
through
the
corporation
in
circumstances
when
he
or
she
would
normally
provide
the
services
as
an
employee.
Thus,
in
effect,
the
shareholder
is
an
“incorporated
employee".
2132
More
specifically,
a
“personal
services
business"
is
a
business
carried
on
by
a
corporation
where
the
services
are
performed
on
behalf
of
the
corporation
by
an
individual
(or
any
person
related
to
the
individual)
who
is
a
specified
shareholder
of
the
corporation,
and
the
individual
can,
ignoring
the
interposition
of
the
corporation
between
him—or
herself
and
the
person
to
whom
the
services
are
rendered,
"reasonably
be
regarded”
as
an
officer
or
employee
of
the
entity
to
which
the
services
are
providea.
The
test
comes
down
to
this:
if
one
notionally
ignores
the
existence
of
the
“incorporated
employee’s”
corporation,
can
the
relationship
between
the
individual
and
the
person
to
whom
he
or
she
renders
services
be
regarded
as
an
employment
relationship?
If
so,
the
income
is
PSBI,
and
is
taxed
accordingly.
One
of
the
key
elements
in
determining
whether
a
personal
services
business
exists
is
succinctly
summarized
in
CCH
Canadian
Limited,
Vol.
4,
at
No.
19,563:
The
expression
“personal
services
business”
is
defined
in
paragraph
125(7)(d).
It
consists
of
providing
the
services
of
an
"incorporated
employee"
to
an
entity
of
which
the
incorporated
employee
would
otherwise
reasonably
be
regarded
as
an
officer
or
employee.
Accordingly,
it
will
be
necessary
to
determine
whether
the
corporation
is
providing
the
services
of
an
employee
or
an
independent
contractor.
The
critical
issue
is
whether
there
is
a
contract
of
services
(an
employee)
or
a
contract
for
services
(an
independent
contractor).
Paragraph
4
of
Interpretation
Bulletin
IT-525
(52,530)
states
that
“a
contract
of
service
generally
exists
if
the
person
for
whom
the
services
are
performed
has
the
right
to
control
the
amount,
the
nature
and
the
direction
of
the
work
to
be
done
and
the
manner
of
doing
it.
A
contract
for
services
exists
when
a
person
is
engaged
to
achieve
a
prescribed
objective
and
is
given
all
the
freedom
he
requires
to
attain
the
desired
result’’.
At
the
same
time
as
a
personal
services
business
was
excluded
from
the
definition
of
an
“active
business”
under
section
125
(for
taxation
years
commencing
after
November
12,
1981),
paragraph
18(1)(p)
was
introduced
to
limit
deductions
in
computing
the
income
from
such
a
business.
All
such
deductions
are
disallowed
except
(i)
salary,
wages
or
other
remuneration
paid
to
an
incorporated
employee,
(ii)
selling
and
similar
expenses
that
would
have
been
deductible
in
computing
his
employment
income
if
he
had
expended
them,
and
(iii)
legal
expenses
incurred
in
collecting
amounts
owing
for
services
rendered.
In
the
present
case
the
Court,
on
the
basis
of
all
of
the
evidence
submitted,
has
concluded
that
because
of
the
nature
of
the
agreement
and
the
fact
that
the
appellant,
through
Mr.
Healy,
was
carrying
on
several
other
ventures
during
the
years
in
question
his
relationship
to
Network
was
a
contract
for
services
rather
than
a
contract
of
service.
It
is
true
that
Mr.
Healy
was
an
officer
and
director
of
Network
but
the
nature
of
the
services
he
provided,
principally
the
development
of
a
computer
program
were
not
of
an
“employee”
nature.
He
had
no
office
at
Network's
premises
and
was
hardly
ever
involved
in
the
day
to
day
operations
of
Network.
The
case
in
issue
is
extremely
different
from
the
case
of
Sazio
v.
M.N.R.,
[1968]
C.T.C.
579,
69
D.T.C.
5001
(Ex.
Ct.)
and
other
employee
situations
which
appear
to
be
the
target
of
the
relevant
sections
of
the
Act.
For
the
above
reasons
the
Court
has
concluded
that
the
appellant
was
not,
during
the
years
in
uestion,
a
personal
services
business
with
the
result
that
the
appeals
are
allowed.
There
shall
be
no
award
as
to
costs
for
counsel
as
the
appellant
was
not
represented
by
counsel.
However,
the
appellant
shall
be
entitled
to
disbursements
made
under
Schedule
II,
Tariff
A
and
all
other
disbursements
essential
for
the
conduct
of
the
proceeding
as
contemplated
in
subsection
1.(2)
of
Tariff
B.
Appeal
allowed.
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