23 February 1996 Ruling 960053A - PERSONAL SERVICES BUSINESS

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:

Whether a business to be incorporated would be considered to be a personal services business.

Position:

It probably would, although cannot determine conclusively.

Reasons:

Not clear from the facts provided. Agreement between payor and corporation providing the services not available.

								5-960053
XXXXXXXXXX							C. Chouinard

Attention: XXXXXXXXXX

February 23, 1996

Dear XXXXXXXXXX:

Re: Active Business - Subsection 125(7) of the Income Tax Act

We are writing in reply to your letter which we received on December 27, 1995, wherein you asked us to confirm that the business you plan to incorporate will qualify as an "active business" within the meaning of subsection 125(7) of the Income Tax Act (the "Act").

You indicate that the business in question will provide consultative computer services and software products targeted to the medical field. However, you are concerned that the business might be considered to be a "personal services business", since, initially, you will be providing all of your services to one client. In this regard, you indicate that you will be developing a strategy to move the client's operations to another city and new processes to improve business operations. As such, you will provide direction to a project team made up of the client's business managers and information technology analysts and will report to the project steering committee. You will be remunerated for your services on a per diem basis, which will be subject to adjustment should the project require more time than expected. The client will be billed separately for travel costs. Your hours of work will be the client's normal business hours. You will be purchasing a laptop computer and software in order to perform your work, however, the client will provide you with a workspace and access to management and the information technology analysts. You also indicate that you will not be entitled to participate in the client's group life insurance plan, short and long term disability plan, extended healthcare plan, dental plan and pension plan.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

The Department's position regarding income from an active business and the related issues concerning specified investment business and personal services business are set out in Interpretation Bulletin IT-73R4, a copy of which is enclosed. The expression "active business" is defined in subsection 125(7) of the Act and includes any business carried on other than a "specified investment business" or a "personal services business".

Whether or not a particular corporation is a personal services business is a question of fact to be determined from an examination of all the facts. However, the Act provides that a corporation is considered to carry on a personal services business if an individual (the "incorporated employee") performs services on behalf of the corporation, the incorporated employee or a person related thereto owns 10% or more of the shares of the corporation and the incorporated employee would otherwise, but for the existence of the corporation, reasonably be regarded as an employee or officer of the entity to which the services are provided. There are some exceptions for corporations employing throughout the year more than five full time employees and for situations where the services are provided to associated corporations.

In order to determine whether a business is a "personal services business", it is necessary to first determine whether the incorporated employee could reasonably be regarded as an employee of the entity to which the services are provided. Therefore, the question to be determined in the situation you describe is whether you could reasonably be considered to be an employee of the client, were it not for your incorporated business. Since it is a question of fact whether an individual performs services for a payor as an employee or an independent contractor, the question of whether there would be an employee/employer relationship between yourself and the client could only be answered by examining all of the facts. As indicated in paragraph 18 of IT-73R4, the following list of factors, although not all inclusive, are indications of employee status:

(a)the entity to which the services are provided has the right to control the amount, the nature and the direction of the work to be done and the manner of doing it;

(b)the payment for the work is by the hour, week or month;

(c)payment by the entity of the worker's travelling and other expenses incidental to the payor's business;

(d)a requirement that a worker must work specified hours;

(e)the worker provides services for only one payor; and

(f)the entity to which the services are provided furnishes the tools, materials and facilities to the worker.

Given the above-mentioned factors and in light of the information provided, we are of the view that you would likely be considered to be an employee of the client to which the services will be provided. However, as the determination of whether an incorporated employee would otherwise be regarded as self-employed or as an employee of the entity to which the services are provided is a question of fact, your local Tax Services Office would be in a better position to answer your query. Accordingly, we suggest you contact personnel at your local Tax Services office, who should be able to make a conclusive determination of your status with certain additional information, such as, the extent to which the client will control your work and whether you will be entitled to provide consultative computer services to other entities while working on this particular project. You should also submit for their consideration any written agreement between your incorporated business and the client regarding the services to be provided.

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

Encl.