Tiessen Interior Design – Federal Court of Appeal confirms s. 256(2.1)’s application to stop a professional firm multiplying the small business deduction

An incorporated firm of architects and interior designers restructured, so that their practice was now carried on by a partnership between “Partnercos” owned by each of them. The principals were now exclusively employed by respective Servicecos controlled by them, which provided their services to the respective “paired” Partnerco for fees, which were deemed to be business income under s. 129(6).

The Tax Court found that one of the main reasons for the reorganization and for the separate existence of the 30 corporations was the reduction of taxes through multiplication of the small business deduction (“SBD”), so that s. 256(2.1) applied to deem the corporations to be associated, thereby denying the SBD multiplication.

The taxpayers now submitted that the Tax Court had erred by not focusing on whether one of the main reasons each particular Partnerco had chosen to pair itself with a new Serviceco was tax reduction rather than on what was the purpose of undertaking the reorganization for the 30 corporations as a whole. Woods JA found that “the evidence and factual findings in the Tax Court may well have been different had the parties been focussed before the Tax Court on the issue [now] raised by the Appellants” so that this argument could not now be raised, and dismissed the taxpayers’ appeal.

Neal Armstrong. Summary of Nicole L. Tiessen Interior Design Ltd. v. Canada, 2022 FCA 53 under Federal Courts Act, s. 27(1.3).