Corporations carried on “personalservices business” – small businessdeduction denied
A Canadian-controlled private corporation (CCPC) is generally eligible for the small business deduction on the first $500,000 of its active business income each year. However, an anti-avoidance rule in the Income Tax Act provides that if the corporation carries on a “personal services business”, it is not eligible for the small business deduction, and its deductions from income are significantly restricted. (As well, since 2011, it pays a much higher tax rate than even large corporations.)
In general terms, your company carries on a personal services business if you perform services on its behalf for another entity, and but for the existence of the company, you would be considered an employee of that other entity. (For these purposes, the rule can apply if you, combined with any close relatives, own at least 10% of the shares of any class of the company.) This rule is aimed at preventing someone who would otherwise be an employee of a firm from carrying on employment-like duties for the firm through a CCPC, thus attempting to claim the small business deduction.
In the recent case of 9016-9202 Québec Inc. et al, a garbage collecting firm (EBI) previously hired numerous individuals as employees to perform the collection duties. However, the firm came up with a plan to convert the employment structure to one involving independent contractors. The individuals each set up a CCPC (EBI handled all the mechanics for them), and the CCPCs then entered into new contracts with EBI to perform the various garbage collection duties (the individuals carried out those duties on behalf of the CCPCs). The CRA assessed the CCPCs and denied the small business deduction on the grounds that they were carrying on personal services businesses.
On appeal to the Tax Court, the CRA assessments on this issue were upheld. The Court compared the previous duties of the employees to the duties performed by the CCPCs and found that they were very similar. Significantly, the CCPCs were required to use the same garbage collection trucks and equipment provided by EBI, and EBI supervised and monitored the activities of the CCPCs in much the same manner as it previously did for the employees. The Court concluded that, but for the existence of each CCPC, each individual shareholder of the CCPC (a former employee) would have been considered an employee of EBI, and therefore carried on a personal services business.