7 October 1991 Income Tax Severed Letter - 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.

Subject: Personal Services Business

We are writing in response to your memorandum of September 3, 1991, concerning XXX and whether the company is a personal services business as envisaged by paragraph 125(7)(d) of the Income Tax Act (the "Act").

The fact as given are as follows:

• 1. XXX
• 2. XXX
• 3. XXX

Your Position

XXX

Taxpayer's Position

The accounting representatives have analyzed the definition of a "personal service business" in accordance with the tests and principals put forth in Wiebe Door Services Ltd. [[1986] 2 C.T.C. 200] (87 DTC 5025). They have concluded that the factors which point to XXX not being a personal service corporation far outweigh any factors which point to XXX being a personal service corporation.

Our Opinion

• (1) Personal Services Business

One of the requirements for the application of paragraph 125(7)(d) of the Act is that the "... incorporated employee would reasonably be regarded as an officer or employee of the person ... to whom or to which the services were provided but for the existence of the corporation ..." on behalf of which he performed the services. This paragraph requires that the incorporated employee be reasonably regarded as either an "officer" or "employee". Whether there exists a contract of service or a contract for services can only be determined after examining all the particular facts of the situation between XXX

In considering the situation, we have also referred to the Wiebe Door Services Ltd. case [[1986] 2 C.T.C. 200] (87 DTC 5025) in which the tests of control, ownership of tools, chance of profit or risk of loss, and integration were mentioned as those that could generally be used to resolve an issue such as that described above. XXX In the Moose Jaw Kinsmen Flying Fin Inc. case [[1988] 2 C.T.C. 2377] (88 DTC 6099), the Federal Court of Appeal commented that relying only on the four tests referred to in the Wiebe case was the wrong approach. In our view, it is necessary to examine all the facts of the alleged employment relationship taking into account those tests which may be applicable and giving the proper weight to those tests as the circumstances dictate.

Employer - Employee vs Independent Contractor Relationship

The determination of whether a taxpayer is an employee or an independent contractor is a question of fact. The court decisions relating to the subject have basically established tests that must be applied in determining whether a particular contract is a contract of service or a contract for services.

Following is a brief discussion of these tests:

• (a) TEST OF CONTROL

The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his employee is greater than that which is exercised in an independent contractor relationship. For instance, in a master-servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.

XXX

• (b) INTEGRATION TEST

This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.

XXX

• (c) ECONOMIC REALITY TEST

This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself or for someone else. The objective of this test is to verify the existence of various factors of an economic nature, and, using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.

XXX

• (d) SPECIFIED RESULTS TEST

This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases. Also it usually does not require that the undertaking be carried out by a particular individual. In contrast, in an employer - employee relationship, the employee makes himself available to the employer to be used by the employer without reference to a specified result.

XXX

Not all of the foregoing tests will be relevant in all cases or have the same degree of importance in all cases and no single test will in all circumstances be viewed as conclusive. However, cases to date have in most instances indicated that the most important distinguishing factor is the nature of control exercised by the employer over the employee. Based upon our review and careful analysis of the given facts of this particular situation to which the above tests have been applied, it is our opinion that the relationship is one of a contract for services.

• (2) Separate Businesses

The test as to whether separate businesses exist is found in Scales v. George Thompson & Company Limited (1927), 13 TC 83. The court found it to be a question of fact whether or not different operations constitute one business or two separate businesses. It further stated that the real question is whether or not there are any inter-connection, any interlacing, any interdependence, any unity at all embracing those two businesses.

Factors that are relevant in making such a determination are provided in paragraph 3 of Interpretation Bulletin IT-206R and include

• (a) the extent to which the two operations have common factors that may be pertinent,
• (b) whether the operations are carried in the same premises,
• (c) whether one operation exists primarily to supply the other,
• (d) whether the taxpayer's accounting system records the transactions of both operations as if they were those of one business, or whether separate complete set of records are maintained throughout the year.

It is necessary to make a distinction between the "business" of a company and the various operations through which the company carries on that business. The business of servicing XXX customers and servicing other customers constitute the same business because, in our view, these operations have sufficient common factors to determine that there is an interconnection or interdependence between the operations.

Where a self-employed agent incorporates as a Canadian-controlled private corporation, as defined in paragraph 125(7)(b) of the Income Tax Act, we are of the view that a small business deduction under subsection 125(1) may be available to the corporation, if the corporation otherwise qualifies for this deduction. Where the corporation is providing the services of an independent contractor, as appears to be the situation at hand, it is not considered to be providing the services of an "incorporated employee". As a result, income earned by the corporation is not considered income earned by a personal services business as envisaged in paragraph 125(7)(d) of the Act.

• (3) Application of Subsection 56(4) of the Act

Subsection 56(4) of the Act applies where a taxpayer has transferred or assigned to a person with whom the transferor was not dealing at arm's length the right to an amount which, had the right not been transferred or assigned would be included in the income of the transferor.

XXX

We trust the above will be of assistance.