9016-9202 Québec Inc. – Tax Court of Canada finds that CRA used gross negligence penalties as a lever to terminate a tax avoidance structure

In 1995 a Quebec garbage collection company (EBI) had a brilliant idea: its garbage collectors would become incorporated independent contractors.  A difficulty was that it is essentially impossible to expect that level of employee to now start behaving like an entrepreneur.  Not only were their (highly-supervised) functions essentially unchanged, but EBI completely administered their new companies through its accountants (and used its address as the companies’ address).

While the individual companies’ Notices of Objection for their 2004 to 2006 years were still under review, CRA reassessed their 2007 and 2008 years to not only deny expenses under the personal services business rules but also to impose gross negligence penalties – at which point EBI caved and the individuals became its employees again. Before vacating the penalties (but confirming the application of the PSB rules to all the reassessed years), Favreau J stated:  "The sole reason that the penalties were imposed appears to me to have been to force the parties to terminate the structure."

Neal Armstrong. Summaries of 9016-9202 Québec Inc. v. The Queen, 2014 TCC 281 under s. 125(7) – "personal services business" and s. 163(2).