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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: We have been asked whether a corporation that provides services can be regarded as carrying on more than one business and whether it might be construed as carrying on a "personal services business" as defined in subsection 125(7) of the Act.
Position. We have only provided general comments in respect of the issue of whether two separate businesses are being carried on simultaneously (IT-206R discusses this issue) as well on the "incorporated employee" condition within the definition of "personal services business".
Reasons: We were only provided with limited information.
XXXXXXXXXX 2002-016539
M. Eisner, CA
December 9, 2002
Dear XXXXXXXXXX:
Re: Personal Services Business
This is in reply to your letter dated September 28, 2002, concerning the above-noted subject.
In the circumstances of your situation, a corporation (the "Corporation") was incorporated in Canada and is a "private corporation" as defined in subsection 89(1) of the Income Tax Act (the "Act"). The sole shareholder of the Corporation is a Canadian resident. A general description of the Corporation's activities is that it provides management consulting services. You have described two types of contracts carried out by the Corporation and enquire whether it is carrying on a "personal services business" as defined in subsection 125(7) of the Act and whether it can be viewed as carrying on more than one business. You indicate that the contracts are similar in nature and that the Corporation does not employ more than five full-time employees.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Where the transactions are completed, the enquiry should be submitted to your local Tax Services Office. However, we are prepared to provide the following comments in respect of your situation, which are of a general nature.
As you are no doubt aware, the CCRA's general position on the small business deduction is set out in Interpretation Bulletin IT-73R6, The Small Business Deduction. In certain circumstances, subsection 125(1) of the Act provides for a reduction (the "small business deduction" ("SBD")) from Part I tax otherwise payable for a taxation year by a corporation that was, throughout the taxation year, a "Canadian-controlled private corporation" as defined in subsection 125(7) of the Act. As indicated in paragraph 2 of IT-73R6, the SBD is based on the least of three components with one of the components including the corporation's income from an active carried on by it in Canada. The term "active business carried on by a corporation", as defined in subsection 125(7) of the Act, excludes a "specified investment business" or a "personal services business" as defined in subsection 125(7) of the Act. Accordingly, a personal services business does not qualify for the small business deduction and is, therefore, subject to tax at full corporate rates. In addition, paragraph 18(1)(p) of the Act limits the deductions permitted in computing a corporation's income for a taxation year from a personal services business.
The definition of personal services business provides, in part, that it "means a business of providing services where ... the incorporated employee would reasonably be regarded as an officer or employee of the person ... to whom or to which the services were provided but for the existence of the corporation ...". It is a question of fact whether or not different operations constitute one business or two separate businesses. The test as to whether "a business" or separate businesses exist is set out in the English High Court decision in Scales v George Thompson & Company Limited (1927), 13 TC 83 and is reflected in paragraph 2 of IT-206R, Separate Businesses. Part of this paragraph states that "Whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon the degree of interconnection, interlacing or interdependence and the extent of the unity embracing the business operations." Factors that are relevant in making such a determination are provided in paragraph 3 of IT-206R. In our view, in the above situation, the fact that all of the activities of the Corporation relate to management consulting services and that its contracts are similar in nature would be prima facie evidence that the Corporation is carrying on one business.
The issue of whether the incorporated employee would reasonably be regarded as an officer or employee of the person to whom the services were provided is a question of fact. Reference may be made to the Federal Court of Appeal decision in Wiebe Door Services Ltd. (87 DTC 5025) in which the tests of control, ownership of tools, chance of profit or risk of loss, and integration were mentioned as those that could generally be used to resolve the issue of whether an individual performs services as an employee or an independent contractor. Paragraph 19 of IT-73R6 also provides a list of factors which are indicative of employee status.
The definition of "personal services business" in subsection 125(7) of the Act provides some exceptions for corporations employing, throughout the year, more than five full-time employees and for situations where the services are provided to associated corporations. In the above situation, as the Corporation does not employ more than five full-time employees, and assuming that no services are provided to associated corporations, these exceptions will not apply.
As a final comment, we note that a determination of the issues you have raised can only be made following the review of all the relevant facts and documentation. If you require further assistance, we suggest you contact your local Tax Services Office as a review of such issues falls within the responsibility of tax services offices.
We trust that our comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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