Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: We have been asked some questions about the definition of "personal services business" in subsection 125(7) of the Income Tax Act (the "Act").
Position: On the basis of information provided, general Comments were provided.
Reasons: See Position
XXXXXXXXXX 2000-000530
M. Eisner
April 10, 2000
Dear Sir/Madam:
Re: Employee/Employer Relationships
This is in reply to your letter of February 2, 2000 concerning the above-noted subject.
Your concerns relate to individuals who operate equipment, drive trucks, or provide their labour in connection with the resource industry. During the course of a year, they will perform services for a number of companies. There are situations where it is clear that an employee/employer relationship exists with the result that the employers would be required to withhold and remit income taxes, Canada Pension Plan ("CPP") contributions and Employment Insurance ("EI") premiums. The employer would also have to pay its share of the CPP contributions and EI premiums.
However, there are also situations where individuals consider themselves to be self-employed. Since it can be unclear whether an employee/employer relationship exists, you have asked about the circumstances where the equipment operator or the truck driver proceeds to establish a corporation which provides the services of the Individual to a company in the resource industry. While it may cost $800 to $1,200 to establish a corporation and the company must pay a lawyer to file annual reports, it may prevent a corporation to whom services are being provided, from being required to remit CPP contributions, EI premiums and income taxes.
We have provided you with general comments to the extent that we were able to do so. The following comments do not relate to any specific fact situation. We also note that the Agency is not able to provide information concerning the arrangement of business affairs.
In general terms, a "personal services business" (this term is defined in subsection 125(7) of the Income Tax Act (the "Act")) which is carried on by a corporation, is defined to be a business of providing services in circumstances where the shareholder (the "incorporated employee") of that corporation would, if it were not for the existence of the corporation, reasonably be regarded as an officer or employee of the entity to whom the services were provided. However, if, in the absence of the corporation, there would be no common law master-servant relationship and the individual who undertakes to perform the services would be viewed as a self-employed individual carrying on a business, the individual would not be considered to be an incorporated employee. For more detailed information on a personal services business, we refer you to paragraphs 18 and 19 of Interpretation Bulletin IT-73R5 "The Small Business Deduction", which has been enclosed.
A corporation, which carries on a personal services business, is not entitled to the "small business deduction" in respect of the personal services business. As well, paragraph 18(1)(p) of the Act generally limits the deductions allowed to wages and benefits paid to the incorporated employee in computing a corporation's income for a taxation year from a personal services business.
In connection with a personal services business, we note that employment is not insurable and is not subject to EI premiums when a corporation employs a person who controls more than 40% of the corporation's voting shares (see enclosed page 21 of the "Employer Guide to Payroll Deductions").
Where a corporation carries on a personal services business, it is that corporation, rather than the corporation to whom services are being provided, that is required to withhold and remit (including the employer's share of EI and CPP) income taxes, CPP contributions, and, if necessary, EI premiums.
You have also asked about the expenses that a company could deduct where the company supplied drivers, operators or labourers and how a company could diversify its business so it that it would not be considered to be carrying on a personal services business. On the basis of the limited information provided, it is not possible to provide meaningful comments. However, please note that no deduction in computing a corporation's income from a personal services business may be made with respect to amounts relating to employees other than incorporated employees. If, on the other hand, the corporation is carrying on an active business, expenses that are laid out to earn income from business or property are deductible under paragraph 18(1)(a) of the Act (unless the Act provides otherwise - e.g., section 67 of the Act limits the deduction of expenses to the extent that they are reasonable).
With respect to your scenario, the problem which you are attempting to resolve is the procedure to follow in determining whether certain individuals, who perform services for resource companies, are employees or are self-employed. This issue still exists even though an individual may incorporate his or her own company for the purposes of providing services to another company. In order to resolve this issue, we would suggest that reference should be made to the enclosed guide entitled "Employee or Self-Employed?". Should you need further assistance, you may also contact your tax services office (see item 1.4 "Integration" of that guide), in order to obtain a ruling request form.
We trust that our comments are of assistance.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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