17 December 2004 External T.I. 2004-0098531E5 - Calculation of Income - 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.

Principal Issues: Whether a personal services business is entitled to deduct the Ontario Employer Health Tax (EHT) and the employer's portion of the Canada Pension Plan (CPP) in respect of the salary paid to an incorporated employee.

Position: Yes.

Reasons: Subparagraph 18(1)(p)(i) provides that expenses incurred by a "personal services business" in respect of the salary paid to an incorporated employee are deductible by such a corporation provided that the amounts would otherwise be deductible in computing the corporation's income, if its income were from a business other than a personal services business. "Any benefit or allowance" as described in subparagraph 18(1)(p)(ii) is not restricted to paragraph 6(1)(a) benefits and paragraph 6(1)(b) allowances.

XXXXXXXXXX 2004-009853
Kathryn McCarthy, CA
December 17, 2004

Dear XXXXXXXXXX:

Re: Calculation of Income from a Personal Services Business

We are writing in response to your letter of October 15, 2004, concerning the above noted subject.

You described a situation where ManageCo is a personal services business wholly-owned by the sole employee, Mr. X. The obligation to withhold and remit payroll taxes on amounts paid for the services of Mr. X, by Opco, rests with ManageCo. You enquired whether ManageCo is entitled to deduct the Ontario Employer Health Tax (EHT) and the employer's portion of the Canada Pension Plan (CPP) in respect of the salary paid for the services of Mr. X. If the answer is no to either possible deduction, you enquired whether the Canada Revenue Agency would consider recommending a legislative amendment to paragraph 18(1)(p) of the Income Tax Act (the Act).

Our Comments

Written confirmation of the tax implications inherent in particular transactions is 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 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

In general terms, a "personal services business" is defined in subsection 125(7) of the Act and is carried on by a corporation in the business of providing services in circumstances where the specified shareholder (the "incorporated employee") of that corporation would, if it were not for the existence of the corporation, reasonably be regarded as an officer or employee of the entity to whom the services were provided. Paragraph 18(1)(p) of the Act limits the expenses that may be deducted by a personal services business. For example, subparagraph 18(1)(p)(i) provides that expenses incurred by a "personal services business" in respect of the salary paid to an incorporated employee are deductible by such a corporation provided that the amounts would otherwise be deductible in computing the corporation's income, if its income were from a business other than a personal services business. In our view, paragraph 18(1)(p) would not restrict the deduction of the EHT and the employer's portion of CPP incurred by ManageCo in respect of the salary paid to Mr. X.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch