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:
Mr. A owns 100% of A Co. , a CCPC, and A Co. owns 100% of B Co., a non-resident corporation that does not carry on business in Canada. A Co. provides management services and sells the product manufactured by B Co. These activities are carried out from its Canadian office. B Co. pays management fees and commissions to A Co. A Co. has four full-time employees. Mr. A is the President and Chief Executive Officer of B Co. and is responsible for the operation of the business. There are two exceptions to the definition of “personal services business” in subsection 125(7) of the Act. The second exception is that the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year. The issue is whether A Co., a CCPC, is “associated” with B Co., a non-resident corporation, for purposes of the rules set out in section 256.
Position:
A Co. and B Co. would be considered to be “associated” pursuant to paragraph 256(1)(a) of the Act.
Reasons:
See file # 970516, 963605, and 931300.
Subsection 256(1) of the Act refers to “corporation” , not a Canadian controlled private corporation. A non-resident corporation is a “corporation” and a “person” ( as defined in subsection 248(1) of the Act) for purposes of the Act. Accordingly, paragraph 256(1)(a) of the Act would likely apply in the hypothetical situation described so that A Co. and B. Co. would likely be considered to be associated for the purposes of the definition of “personal services business” in subsection 125(7) of the Act.
XXXXXXXXXX 982371
G. Moore
February 1, 1999
Dear XXXXXXXXXX:
Re: Personal Services Business
This is in reply to your letter of September 10, 1998, regarding personal services business.
You have asked for our comments in the following hypothetical situation:
1. Mr. A owns 100% of the issued and outstanding shares of A Co.
2. A Co. is a Canadian-controlled private corporation (“CCPC”)
3. A Co. owns 100% of the issued and outstanding shares of B Co.
4. B Co. is a corporation incorporated in the United States which carries on an active business in the United States.
5. A Co. provides management services and sells the product manufactured by B Co. These activities are carried out from its Canadian office.
6. B Co. pays management fees and commissions to A Co.
7. A Co. has four full-time employees.
8. Mr. A is the president and Chief Executive Officer of B Co. and is responsible for the operation of the business.
A “personal services business” is defined in subsection 125(7) of the Income Tax Act (the “Act”). There are two exceptions to the definition in the Act. The first exception is if the corporation employs in the business throughout the year more than five full-time employees. The second exception is that the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year.
It is your view that as A Co. owns 100% of the issued shares of B Co., A Co. and B Co. would be associated if B Co. were a resident of Canada. It is your view that B Co. is not a person since it is not taxed or otherwise dealt with under the Act. You also believe that A Co. and B Co. cannot be associated since B Co. is not a corporation for purposes of the associated corporation rules.
You have also indicated that one of the conditions to meet the definition of personal services business is that the individual would be regarded as an officer or employee of the person to whom the services are provided. It is your view that since B Co. is not a person under the Act, Mr. A could not reasonably be regarded as an officer or employee of the person to whom the services are provided. On that basis, you believe that the management business of A Co. is not a personal services business.
As indicated in our reply of December 17, 1996, 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. As you know, pursuant to the definition of “personal services business” in subsection 125(7) of the Act, a corporation is carrying on a personal services business in a taxation year if it is in the business of providing services and an individual who performs the services on behalf of the corporation (referred to as the “incorporated employee”) or any person related to the incorporated employee, is a specified shareholder and would, if it were not for the existence of the corporation, reasonably be regarded as an officer or employee of the person or partnership to which the services were provided. One of the exceptions to this definition is that the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year.
We disagree with your comments that B Co. would not be a “person” for purposes of the definition of “personal services business” in subsection 125(7) of the Act. As indicated in our previous letters to you, it is generally the Department’s view that a foreign corporation is a “person” for purposes of the Act unless the context clearly indicates otherwise. With respect to the definition of “personal services business”, there is no basis to consider that the test regarding “to whom” the services were rendered should be limited to Canadian residents or non-residents who are subject to Canadian income tax.
We also note that the associated corporation rules in section 256 have been amended subsequent to the judgments rendered in the court cases you mentioned in your letter.
With respect to the issue of whether A Co. and B Co. are associated for purposes of the exception set out in paragraph (d) of the definition of “personal services business” in subsection 125(7) of the Act, we are of the opinion that pursuant to paragraph 256(1)(a) of the Act, the two corporations are associated since subsection 256(1) refers to a “corporation”, not a CCPC. Accordingly, the exception set out in paragraph (d) of the definition of “personal services business” in subsection 125(7) of the Act would apply and A Co. would not be precluded, for this reason, from being eligible to claim the small business deduction.
We trust our comments will be of assistance to you.
Yours truly,
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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