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: Whether the decision of the Federal Court of Appeal in Lerric Investment Corp. changes our assessing practices with respect to the determination of whether a corporation carrying on a business as a member of a joint venture employs more than 5 full-time employees for the purposes of the definition of "specified investment business" in subsection 125(7) of the Act.
Position: Yes.
Reasons: The Court's decision cannot be distinguished based on the facts of the case. It clearly rejected the allocation method described in IT-73R5 with respect to a corporation carrying on a business as a member of a joint venture. The administrative practice suggesting an allocation of employees of a joint venture is therefore no longer appropriate. Unless the corporation, as employer, has a direct relationship with the specified employee, it cannot be considered to have employed the employee.
XXXXXXXXXX 2001-007664
Patrick Massicotte
June 25, 2001
Dear XXXXXXXXXX:
Re: Specified Investment Business
We are writing in response to your fax of March 24, 2001, wherein you requested our comments regarding our assessing practices in respect of the determination of the number of full-time employees of a corporation for the purposes of the definition of "specified investment business" in subsection 125(7) of the Income Tax Act (the "Act").
More specifically, you inquire whether the comments made in respect of a corporation participating in a joint venture in paragraph 16 of IT-73R5, The Small Business Deduction, are still applicable given the recent decision of the Federal Court of Appeal in the case of Lerric Investments Corp. (2001 DTC 5169).
The Lerric case involves a corporation carrying on a real estate rental business in part through joint ventures with other corporations. It employed 2 full-time employees itself and shared, in various proportions, the cost of 15 other full-time employees through its minority interest in a number of joint ventures. For the purposes of section 125 of the Act, the taxpayer aggregated its 2 full-time employees with its share of the joint ventures' full-time employees, representing bits and pieces, to arrive at fractionally more than 5 full-time employees overall during the years in issue (varying from 5.05 to 5.35). The issue was whether the taxpayer could add to its own full-time employees its share of the joint ventures' full-time employees in determining whether it had more than 5 full-time employees for the purposes of the definition of "specified investment business" in subsection 125(7) of the Act.
The Tax Court of Canada considered the issue and dismissed the taxpayer's appeal. The taxpayer's appeal was also dismissed by the Federal Court of Appeal. The Federal Court of Appeal unanimously concluded the words of the provision that were determinative were: "the corporation employs". Having regard to the fact that the provision is a measure of business activity, it observed that this is a "crucial phrase" that "connotes a direct relationship between the corporation as employer and the specified employees", thereby disallowing the taxpayer to consider the joint venture's employees as its own. Moreover, the allocation method was also rejected as not being "envisaged by the words of sub-paragraph 125(7)(e)(i)." The Court added the following in that respect:
"As I have stated, the provision simply conceives of a single corporation employing more than five full-time employees. There are no words in the provision that imply that a proportional or sharing approach of the same employee by different employers is contemplated."
The Court mentioned that allocating employees would involve "reading words into the provision that were not placed there by Parliament" adding that:
"No co-owner or joint venturer can say that it individually employs the employees or portions of the employees. They can say that, in accordance with the co-ownership or joint venture agreement, they are responsible for a percentage of each employee's wages.
The Court accepted that the provision was "an arbitrary proxy for an active business" which may not accommodate every deserving situation. Admittedly, it may lead to illogical results but the Court concluded that "...applying an arbitrary rule to situations not contemplated by the rule will have that effect because it is arbitrary. Be that as it may, it is the duty of the Court to take the statute as it finds it."
Based on the Federal Court of Appeal's decision in Lerric, there is clear indication that the wording of the provision cannot allow an employee of a joint venture to be considered an employee of each joint venturer, nor does it allow a proportional or sharing approach of the same employees by different corporations in a joint venture. Therefore no allocation of a joint venture's employees to the co-venturers is appropriate.
Although it could be observed that the Lerric case concerned a particular situation where only fractions of each joint venture's employees were allocated to a corporation, in our opinion, it is not possible to limit it to its facts. This decision stands for the proposition that a direct relationship must exist between the corporation as employer and the employees to come within the "more than 5 full-time employees" requirement in the definition of "specified investment business" in subsection 125(7) of the Act. As this goes against the position set out in IT-73R5, the reference to the allocation method in paragraph 16 of the bulletin, in relation to joint ventures and co-ownerships, is no longer applicable and the bulletin will be updated to reflect the Lerric case.
With regards to partnerships, changes are not expected to be required as in our opinion the wording of section 125 of the Act allows for the approach described in paragraph 16 of IT-73R5.
We hope that the above comments will be of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
c.c.: Roxane Brazeau-Leblond, CA
Manager
Technical Publications and Projects Section
- 3 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001
Email this Content