29 June 2005 Internal T.I. 2005-0122731I7 - Bona Fide employer-employee relationship

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: 1) is a "personal services business" as defined in subsection 125(7) of the Act precluded from qualifying as a "participating employer" as that term is defined in subsection 147.1(1) of the Act?

2) Can the relationship that exists between a "personal services business" and an "incorporated employee" constitute a bona fide employer-employee relationship for purposes of the primary purpose requirement in paragraph 8502(a) of the Income Tax Regulations?

Position: 1) No, a personal services business is not precluded from qualifying as a "participating employer".

2) It is a question of fact whether a bona fide employer-employer relationship exists in a particular situation. However, It is our view that an employer-employee relationship must exist for the primary purpose test in paragraph 8502(a) to be satisfied.

Reasons: 1) wording of the definition of "participating employer" In subsection 147.1(1)
2) wording of paragraph 8502(a) of the Regulations

June 29, 2005

	HEADQUARTERS	HEADQUARTERS
	Registered Plans Directorate	Financial Industries Division
G. Moore
	Attention:  Steve Dehler	957-8982

2005-012273

Paragraph 8502(a) of the Income Tax Regulations

This is in reply to your inquiry of March 29, 2005, wherein you requested our views regarding the following two issues:

1) Is a "personal services business" as defined in subsection 125(7) of the Income Tax Act (the "Act") precluded from qualifying as a "participating employer" as that term is defined in subsection 147.1(1) of the Act?

2) Can the relationship that exists between a "personal services business" and a "specified shareholder", and/or an "incorporated employee" constitute a bona fide employer-employee relationship for purposes of the primary purpose requirement in paragraph 8502(a) of the Regulations and under what circumstances?

Registered Plans Directorate's Position:

It is your position that an employer-employee relationship must exist for the primary purpose test of paragraph 8502(a) to be satisfied. This relationship must also exist for the employee's service with that business to be eligible under paragraph 8503(2)(a) and for the related contributions by the employee and the employer to be permissible under paragraph 8502(b) of the Regulations.

Our Comments

Personal Services Business:

In general terms, subsection 125(7) of the Act defines a "personal services business" carried on by a corporation, 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.

Employee versus Self-Employed:

Whether a person is an employee or a self-employed contractor is a question of fact, which can only be determined following a complete analysis of the circumstances of a particular situation. Many factors must be taken into consideration in establishing whether or not there is an employee-employer relationship. Moreover, no one factor, in and of itself, will result in the determination of the relationship.

One key factor is the determination of whether the contract between the parties is a contract of service (employer-employee relationship) or is a contract for services (self-employed contractor). Generally, a contract of service exists if the person for whom the services are performed has the right to control the amount, the nature and the management of the work to be done, as well as the manner of completing the work. A contract for services exists when a person is engaged to achieve a defined objective and is given all the freedom required to attain the desired result.

The courts have established a series of tests to determine whether a particular contract is a contract of service or a contract for services (See, for example, the decision by the Federal Court of Appeal in Wiebe Door Services Limited v. The Minister of National Revenue, [1986] 2 C.T.C. 200, 1987 D.T.C. 5025).

These four tests are as follows:

(a) Control Test - The objective of this test is to assess if the individual is limited or restricted under a "master-servant relationship". It recognizes that in most cases, the degree of control an employer has over the employee is greater than it is in an independent contractor relationship. For instance, in an employee-employer relationship, the employer can order or require not only what is to be done, but also how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.

(b) Integration Test - This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business. Under a contract for services, although the work is done for the business it is not integrated, but only accessory to the business.

(c) Economic Reality Test - This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business independently or working for someone else. The objective of the test is to verify the existence of various factors of an economic nature and, using these factors, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.

(d) Specified Results Test - This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases and it does not usually require that a particular individual carry out the undertaking. In contrast, in an employer-employee relationship, the employee makes himself or herself available to the employer, to be used by the employer without reference to a specified result.

The contract between the parties, which sets out the rights and obligations of each of the parties, provides important information in determining the type of relationship that exists. However, even more important than the contract is the actual circumstances surrounding the performance of services and whether such findings of facts agree with what is stated in the contract. It is also important to note that not all of the foregoing tests will be relevant or have the same degree of importance in varying situations. Moreover, no single test will in all circumstances be viewed as conclusive.

Participating Employer:

As defined in subsection 147.1(1) of the Act, a "participating employer" in relation to a pension plan means an employer who has made or is required to make contributions to the plan in respect of the employer's employees or former employees, or payments under the plan to the employer's employees or former employees, and includes a prescribed employer. In our view, a "personal services business" would not be precluded from qualifying as a "participating employer."

Paragraphs 8502(a), 8503(2)(a) and 8502(b) of the Regulations:

We agree with your view that an employer-employee relationship must exist for the primary purpose test in paragraph 8502(a) of the Regulations to be satisfied. We also agree that an employer-employee relationship must exist for an employee's service with that business to be eligible under paragraph 8503(2)(a) of the Regulations and for the related contributions by the employee and employer to be permissible under paragraph 8502(b) of the Regulations. In our view, by virtue of their definitions in subsection 125(7) of the Act, where, in fact, a situation satisfies the definition of "personal services business" and an individual is an "incorporated employee", then the employer-employee relationship necessary for these Regulations would also be satisfied.

Paragraph 18(1)(p)

Paragraph 18(1)(p) of the Act generally limits the deductions allowed by a corporation, in computing income for a taxation year from a personal services business, inter alia, to wages and benefits paid to the incorporated employee, and certain expenses of the corporation associated with selling property or negotiating contracts that are ordinarily deductible from employment income. In our view, paragraph 18(1)(p) of the Act does not deny the deduction of employer contributions (made by a corporation which carries on a personal services business) to a registered pension plan in respect of an incorporated employee otherwise deductible under paragraph 20(1)(q) of the Act. Our view would be the same, whether the corporation which carries on the personal services business deals at arm's length or not with the corporation to which the services are rendered.

Comment

We note that the representative has referred to Rulings document 9703367 which, in their view, indicates that government subsidy amounts paid to Indian Bands are counted as employment income and that individuals receiving this income are considered to be "employees" even though no employer-employee relationship exists. We would like to clarify that this document deals with whether employment income earned by employees of an Indian Band is taxable. In our view, this situation was considered based on the underlying assumption that there was a valid employer-employee relationship and that the existence of such a relationship was not an issue.

We trust our reply will be of assistance. If you have any questions, please contact Gwen Moore at 957-8982.

Roberta Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch