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.
Principal Issues:
Does the Department consider part-time employees in the "equivalent" test for purposes of the "investment business" definition.
Position: Yes.
(this is a different position than the Department would take with repsect to the definition of "specified investment business")
Reasons:
The wording arguably allows it. It was the intent of the Department of Finance to allow part-time equivalence. (this identical query was already dealt with by section 13 (Olli Laurikainen - see files in HAA 6363-1).
DRAFT
Tax Executives Institute
December 6, 1995
QUESTION 13 - FOREIGN AFFILIATES - INVESTMENT BUSINESS
The exception in subparagraph (b)(ii) of the "investment business" definition in subsection 95(1) of the Income Tax Act (the "Act") contemplates the provision of employment services to an affiliate from a related corporation as a qualifying part of the employment calculation as long as (i) the services are provided off-shore by a related corporation, and (ii) the related corporation is fully reimbursed.
It is often preferable that such companies directly employ the person. Could you confirm that, where two related off-shore companies directly employ a single person on a part-time basis and the cost of such person's salaries and benefits is properly allocated in accordance with the requirement that each bear its proper costs, such person would be counted in the calculation? For example, where a person is employed directly by Company A on an 80 per cent part-time employment contract and the person is also employed directly by Company B on a 20 per cent part-time employment contract, such person would count as an 8/10ths full-time equivalent employee by Company A and a 2/10ths full-time equivalent employee by Company B for purposes of the employment calculation under that definition.
Department's Position
A business carried on by a foreign affiliate of the taxpayer will not constitute an "investment business", as that term is defined in subsection 95(1) of the Act, where the affiliate employs more than 5 employees full time in the active conduct of the business, or the equivalent of more than 5 employees full time in the active conduct of the business taking into consideration only the services provided by its employees and those other circumstances you have described above. The Department's position on what constitutes a full time employee, as it pertains to the definition of "specified investment business" in subsection 125(7) of the Act, is set out in paragraphs 14, 15 and 16 of Interpretation Bulletin IT-73R4. These comments apply equally for the purposes of subparagraph (b)(i) of the definition of "investment business". Many of the comments made by the Department in IT-73R4 have recently been upheld by the Federal Court Trial Division decision in Hughes & Co. Holdings Ltd. v. The Queen (94 DTC 6511).
It is the Department's view that a part-time employee who is employed in the active conduct of the affiliate's business would be considered for the purposes of the "equivalent" test in subparagraph (b)(ii) of the "investment business" definition. In the situation described, provided the person is employed in the active conduct of the business carried on by the two affiliates, the person would count for a 0.8 employee full-time equivalent in respect of the business of Company A and a 0.2 full-time equivalent in respect of the business of Company B.
Author: J. Wilson
File: 953040
Date: November 29, 1995
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