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) Whether a personal services business (PSC) is allowed to own any assets, such as motor vehicle, computer equipment. 2) If a PSC provides an automobile, for which a taxable benefit is assessed to an incorporated employee, can it claim capital cost allowance for the related asset.
Position: 1) A PSC can own assets. 2) A PSC can not claim capital cost allowance for an asset where an incorporated employee is assessed a taxable benefit for the use of that asset.
Reasons: 1) Paragraph 18(1)(p) does not prevent a PSC from owing assets, such as a motor vehicle or computer, but rather places a restriction on the expenses that can be claimed in computing taxable income. 2) Capital cost allowance can not be claimed as indicated in paragraph (24) in 758997 Alberta Ltd. v The Queen 2004 TCC 755.
September 21, 2009
Employer Compliance Audit and Part XIII Tax HEADQUARTERS
Income Tax Rulings
Attention : Kalanithy Kathiravelu Directorate
A/Senior Program Officer
Charles Rafuse
613-247-9237
2009-032924
Personal Services Business
This is in reply to email of June 25, 2009, wherein you requested our views on the interpretation of paragraph 18(1)(p) of the Income Tax Act (the "Act").
You noted that paragraph 18(1)(p) restricts the expenses that a corporation carrying on a personal services business (PSC) may deduct in computing taxable income. You have asked whether a PSC is allowed to own any assets, such as a motor vehicle and computer equipment. In a situation where an incorporated employee is assessed a taxable benefit for an automobile provided by a PSC, you would like to know if the PSC can claim capital cost allowance for the related asset.
Our Comments
Generally, subsection 125(7) of the Act defines a "personal services business" to be, subject to certain exceptions, a business that a corporation carries on to provide services to another entity where an individual, referred to as an "incorporated employee", performs the services on behalf of the corporation and would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation.
Generally, paragraph 18(1)(p) restricts the deduction of outlays or expenses made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a personal service business to:
(i) salary, wages or other remuneration paid to an incorporated employee,
(ii) the cost to the corporation of providing any benefit or allowance to an incorporated employee,
(iii) any amount expended by the corporation in connection with selling property or negotiating contracts if the amount would have been deductible in computing the income from an office or employment of an incorporated employee if it had been expended by the incorporated employee, and
(iv) amounts paid for legal expenses incurred by the corporation in collecting amounts owing for services rendered.
It is our opinion that the Act does not prevent a PSC from owing assets, such as a motor vehicle or computer, but rather only places a restriction on the amounts that it can claim in computing income from a personal service business. It is also our opinion that a PSC is able to claim the cost of providing a benefit or allowance to an incorporated employee, as indicated above. However, it is our view that a PSC cannot claim capital cost allowance as confirmed by the Tax Court of Canada in the case 758997 Alberta Ltd. v The Queen, 2004 TCC 755.
We trust this information is helpful.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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