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.
Principal Issues: Does subsection 207.6(3) of the Act apply to an employee of a corporation that does not carry on a personal services business?
Position: No.
Reasons: Subsection 207.6(3) applies to corporations carrying on a personal services business, as defined in subsection 125(7) of the Act, and employees of such corporations.
XXXXXXXXXX 2003-004577
G. Allen
June 22, 2004
Dear XXXXXXXXXX:
Re: Retirement Compensation Arrangement - Subsection 207.6(3)
This letter is a reply to your letter that was sent by facsimile transmission on October 27, 2003 concerning the application of subsection 207.6(3) of the Income Tax Act (the "Act") to the particular fact situation described below.
The shares of an Opco are held by a Holdco. Holdco charges management fees to Opco for the services of an individual. The individual then bills Holdco for management fees through the individual's consulting business. Opco has established a retirement compensation arrangement ("RCA") for Holdco.
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, as would appear the case based on the facts provided in your letter, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra.gc.ca/tax/technical/incometax/menu-e.htm l.
In general, an RCA is defined in subsection 248(1) of the Act, as a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer, or by a person with whom the employer or former employer does not deal at arm's length, to another person in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer.
Subsection 207.6(3) of the Act is intended to extend the RCA rules to personal service corporations providing services to a person. In general, subsection 207.6(3) of the Act ensures that certain rules will apply where a personal service corporation (a corporation carrying on a personal services business as defined in subsection 125(7) of the Act) or an employee of the personal service corporation enters into an arrangement with a person to whom the corporation is providing services whereby benefits are to be provided under the arrangement on, after, or in contemplation of a substantial change in the services provided to the person by the corporation or by the corporation's employee. Specifically, subsection 207.6(3) of the Act deems an employer-employee relationship to exist between the person and the personal service corporation and deems the benefits to be provided under the arrangement to be benefits received on, after, or in contemplation of a substantial change in the services rendered by the corporation. As a result, the plan or arrangement, may, depending on its terms, constitute an RCA for purposes of the Act.
In a particular situation, it is a question of fact whether a corporation is carrying on a personal services business. Pursuant to the definition of "personal services business" in subsection 125(7) of the Act, the comments in paragraph 18 of IT-73R6, The Small Business Deduction, and based on the limited facts provided in your letter, we would be inclined to agree with your assessment that Holdco would not be a corporation carrying on a personal services business. As a result, the arrangement entered into between Opco and Holdco would not fall within the parameters of subsection 207.6(3) of the Act.
In summary, in order for an arrangement to be considered an RCA for purposes of the Act, the arrangement must satisfy the definition of RCA in subsection 248(1) of the Act and, in the case of a corporation carrying on a personal services business, also fall within the parameters of subsection 206.7(3) of the Act.
We are not in a position to provide comments concerning questions 2 and 3 in your letter as these questions do not concern the interpretation of specific sections of the Act, but rather, concern providing tax planning strategies or advice.
Please be advised that we did not receive copies of the CRA's documents dated January 29 and February 4, 2003 that your letter indicated were enclosed with your facsimile. From the first paragraph of your letter, it would appear that these documents are concerning the RCA established by Opco for Holdco and the related refundable tax. As a result, any queries concerning these documents should be directed to the Winnipeg Taxation Centre, RCA Unit.
We trust the above comments will be of assistance.
Yours truly,
Roberta Albert, CA
Manager
Financial Industries Division
Income Tax Rulings Directorate
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