19 November 1997 External T.I. 9721235 - PERSONAL SERVICES BUSINESS - GENERAL COMMENTS

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 personal services business would exist.

Position:

General comments.

Reasons:

Insufficient facts.

J. Gibbons
XXXXXXXXXX							5-972123

Attention: XXXXXXXXXX

November 19, 1997

Dear XXXXXXXXXX:

We are replying to XXXXXXXXXX letter of June 24, 1997, concerning the eligibility requirements for the small business deduction. XXXXXXXXXX has requested that we forward our response to you. In the situation described in the letter, a taxpayer operates a business as a sole proprietor. The taxpayer’s business has been retained to provide banking services to a corporation owned by the bank manager. XXXXXXXXXX inquires whether, if the sole proprietorship were incorporated, it would be considered to be a “personal services business,” within the meaning of subsection 125(7) of the Income Tax Act (the "Act"). Alternatively, XXXXXXXXXX inquires whether the income from the sole proprietorship could be funnelled through a corporation, of which the sole proprietor and her spouse are equal shareholders, with a view to taking advantage of the corporation’s reduced corporate tax rate.

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 70-6R3. The following comments are, therefore, of a general nature only.

A personal services business is defined in subsection 125(7) of the Act as a business of providing services where an individual performs services on behalf of the corporation and the individual could reasonably be regarded as an officer or employee of the person to which the services are provided but for the existence of the corporation, and the individual or any person related to the individual is a “specified shareholder” of the corporation. According to its definition, a personal services business does not include a corporation which employs in the business throughout the year more than five full-time employees or where the amount received or receivable in the year for its services is from a corporation with which it was associated in the year. A specified shareholder is defined in subsection 248(1) of the Act and generally refers to a taxpayer who owns directly or indirectly, at any time in the year, not less than 10% of the capital stock of the issued shares of any class of the capital stock of the corporation. An individual who performs services on behalf of the corporation would reasonably be regarded as an officer or employee of the person to which the services are provided where there is a common law master-servant relationship and the individual who undertakes to perform the services would not be viewed as a self-employed individual carrying on a business. The determination of whether an incorporated employee would otherwise be regarded as self-employed or as an officer or employee of the entity to which the services are provided is a question of fact. The following list of factors, although not exhaustive, 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 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 limited information provided in the letter, we cannot determine whether, if incorporated, the sole proprietorship would be considered a personal services business.

In regard to the second question, that is, whether the income from the sole proprietorship could be funnelled through another corporation, we cannot provide specific comments since your query is in the nature of tax advice and the Department does not provide tax planning advice. You should be aware, however, that subsections 56(2) and 56(4) of the Act may apply in this situation to tax the income flowed to the corporation in the hands of the proprietor, unless the proprietorship is first transferred to the corporation, whether on a tax-deferred basis under section 85 of the Act or at fair-market value. If the proprietorship is transferred to the corporation, the proprietorship business may be considered to be a separate business from the corporation's existing laundromat business. The question of whether the proprietorship business would be a “personal services business” is a question of fact, as described above.

We are enclosing, for your information, Interpretation Bulletin IT-206R, which discusses the issue of whether separate businesses exist, and Interpretation Bulletin IT-73R5, which deals with the rules concerning the small business deduction.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch