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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
952167
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
March 18, 1996
Dear Sirs:
Re: Non-Capital Losses and Personal Services Business
This is in response to your letter of August 11, 1995, wherein you requested our views on the tax implications of a proposed transaction involving the use of the non-capital losses of a corporation controlled by an individual. We apologize for the delay in responding.
Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. However, we can offer the following general comments.
The Department was asked to comment on a situation similar to that described in your letter at the Round Table on Federal Taxation held at the 1994 annual meeting of the APFF as follows:
"Question 3
Use of the Tax Losses of a Corporation Controlled by an Individual through Conclusion of a Contract of Employment
Mr. X has been employed by Opco Inc. for a number of years. Mr. X is also the sole shareholder of Investco Inc., which has accumulated non-capital losses totalling $250,000. Mr X deals at arm's length with Opco Inc.
Opco Inc. concluded an agreement with Investco Inc., under which the services previously rendered directly by Mr. X are to be rendered by Investco Inc. The annual fees paid to Investco Inc. are to be $75,000. Mr X will be the sole person to render these services for Investco Inc.
Can the non-capital losses of Investco Inc. be applied against the net income from services rendered to Opco Inc.?
....
As long as the legal requirements of Mr. X's resignation from his employment have been met, the fees arising from a legally valid service contract between Opco Inc. and Investco Inc. would constitute Investco Inc. income.
If Investco Inc. and Opco Inc. are not related, the fees would arise from a personal services business and paragraph 18(1)(p) of the Act would disallow the deduction of specific expenses in computing the income derived from this business.
The deduction of a non-capital loss would not be limited or disallowed under paragraph 18(1)(p) of the Act since this paragraph does not apply to a deduction from taxable income.
The Act provides no restriction in respect of the deduction of a non-capital loss in a situation of this kind, ie. in the absence of acquisition of control of the corporation.
The use of a personal services business with a view to allowing the deduction of non-capital losses arising from another business results in a tax benefit for Mr. X. These transactions would be avoidance transactions within the meaning of subsection 245(3) of the Act.
We are unable to make a definitive ruling on the application of subsection 245(2) of the Act without examining all the facts and circumstances relating to the transactions. In the absence of additional facts or circumstances relating to the transactions, we are nonetheless of the opinion that subsection 245(2) of the Act would not generally apply by virtue of subsection 245(4) since there would be no abuse having regard to the provisions of the Act read as a whole.
...."
With respect to withholding, subsection 153(1) provides, inter alia, that every person paying at any time in a taxation year salary or wages or other renumeration, fees, commissions or other amounts for services shall deduct or withhold therefrom such amount as is determined in accordance with prescribed rates and shall remit that amount to the Receiver General on account of the payee's tax for the year, however, where there is no employer-employee relationship between the payor and the payee the Income Tax Regulations do not require the withholding of tax.
As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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