4 February 1998 External T.I. 9728215 - 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: Personal services business?

Position: Question of fact -

Reasons: to be determined after the end of the year

                                        					972821
XXXXXXXXXX		                              		C. Tremblay

Attention: XXXXXXXXXX

February 4, 1998

Dear Sir;

Re: Advance Income Tax Ruling Request - XXXXXXXXXX

This is in reply to your letter of October 17, 1997, and is further to the information supplied on November 17, 1997, requesting an advance income tax ruling on behalf of XXXXXXXXXX.

Although you have asked for an Advance Income Tax Ruling, we are unable to rule as the conclusions are so heavily dependent on the facts of the matter which might vary from year to year. In our view the determination of whether or not a "personal services business" or a "specified investment business" is carried on in the situation described can only be resolved after all relevant details and activities and operations have been reviewed for the year which is not possible till after the end of the year. We also refer you to paragraph 15 (j) of Information Circular 70-6R3. We are, however, prepared to provide you with some general comments.

A "personal services business" is a business carried on by a corporation where the services are performed on behalf of the corporation by an individual (or any person related to the individual) who is a specified shareholder of the corporation, and the individual can, ignoring the interposition of the corporation between him or herself and the person to whom the services are rendered, "reasonably be regarded" as an officer or employee of the entity to which the services are provided. The test comes down to the existence of the "incorporated employee" corporation being ignored and the individual and the person to whom he or she renders the service being regarded as an employer. If so, the income is from a personal services business. This in turn requires an examination of the tests developed by the courts concerning the distinction between an employee and an independent contractor. Those tests include the degree or absence of control exercised over the work done (including the right to control the amount, the nature and the management of the work to be done and the manner of doing it), the ownership of the necessary tools, the chance of sharing profits and the risk of loss, the ownership of the business, the provision of his or her own work place, the earnings associated with the specific results of the work being done, and the degree to which the work being done is integrated with the business. The critical issue is whether there is a contract of service (an employee) or a contract for services (an independent contractor). However, if throughout the year, the corporation employs more than five-full time employees, it will not be regarded as carrying on a "personal services business".

In our view, the rules relating to the income of a "personal services business" or a "specified investment business" may apply only to a portion of the corporation's activities as a corporation may carry on more than one business at the same time. Whether or not such a business is being carried on is, in our view, a question of fact that can only be determined after examining all of the particulars of any specific situation.

In the case at hand, in our view, if an additional client was added to the "packaged office" service offered by the corporation, other than the spouse of the shareholder, this would be a stronger indication that an employer-employee relationship does not exist.

Your deposit will be refunded under separate cover.

The foregoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R3, they are not binding on the Department.

We trust our comments will be of assistance to you

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Division
Policy and Legislation Branch

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