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: Whether a person or partnership must withhold from payments made under an arrangement whereby it contracts with an individual's corporation for services that are currently being rendered by the individual in his or her capacity as an employee.
Position: Provided the contract for service is with the corporation, no.
Reasons: When an individual performs services for a person or partnership on behalf of his or her own corporation under a bona fide contract for service between the corporation and the person or partnership, the person or partnership to whom or to which the services are being provided is not required to withhold source deductions from the payments, as it would generally be required to do if the payments were being made under a contract of service with an employee.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-002160
September 4, 2003
Dear XXXXXXXXXX:
Re: Withholding Requirements - Payments To Incorporated Individuals
We are writing in response to your letter of May 27, 2003, wherein you requested our opinion on the above-noted issue. We also acknowledge the additional information obtained in our telephone conversation of August 27, 2003 (Hewlett/XXXXXXXXXX).
You indicated that your company is considering an arrangement whereby it will contract with an individual's corporation for services that are currently being rendered by individuals in their capacity as employees of the company. Your main concern is whether your company would be complying with the withholding requirements for salaries, wages and other remuneration if it paid the amounts to an individual's corporation under the contract for services.
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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments
In general terms, when an individual performs services for a person or partnership on behalf of his or her own corporation under a bona fide contract for service between the corporation and the person or partnership, the person or partnership to whom or to which the services are being provided is not required to withhold source deductions from the payments, as the person or partnership would normally be required to do if the payments were being made under a contract of service with an employee. It should be noted, however, that only a review of all relevant documentation and facts could establish whether or not the person or partnership has a contract of service with the individual or the corporation.
On the assumption that the arrangement you described is a contract of services with the individual's corporation, it should be further noted that adverse tax consequences could result for the corporation, since it is likely a "personal services business" as defined in subsection 125(7) of the Act. For example, pursuant to paragraph 18(1)(p) of the Act, the outlays and expenses otherwise deductible by a personal services business are restricted, in most cases, to the salary, wages or other remuneration paid in the year to the "incorporated employee".
We trust our comments will be of assistance to you.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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