Personal Services Businesses in the Courts

G & J Muirhead Holdings Ltd. v. The Queen (2014) TCC 49, a recently released judgment from the Tax Court of Canada (TCC), serves as an important reminder to all taxpayers that rely on the corporate status of their small business for favourable tax treatment: the personal services business distinction could cost you. 

Here’s what happened:

Gordon Muirhead and his wife Judy own G & J Muirhead Holdings (the Appellant or the Company). Gordon was the only employee of the Company in 2008, the year at issue. The Company was under contract with another corporation called Harvest Operations Corp. (Harvest) to provide services at oil well sites. The contract did not specify that Harvest was to be the only client of the Company, but that was in fact what happened.

CRA reassessed the company on the basis that it carried on a “personal services business” and therefore was only entitled to the limited deductions available to an “incorporated employee”.

According to the Canada Revenue Agency in T4012 – T2 Corporation Income Tax Guide, a personal service business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform.

The Court must determine if the individual that is performing the services would reasonably be regarded as an employee of the third party purchaser of the services, if the individual and the third party services purchaser had a direct relationship, aside from the individual’s corporation.

Further, there are four main factors for the Court to consider in these cases: the degree of control, ownership of tools, chance of profit, and risk of loss; the same factors that are used to determine the employee/independent contractor disputes. Intention of the parties is not relevant

Honorable Justice Patrick Boyle was unimpressed with the evidence provided in Mr. Muirhead’s defence, especially the lack of evidence relating to the terms and conditions of employment of other employees doing the same work as Mr. Muirhead.

He stated that “the argument that intention is as relevant and helpful in a personal services business case as an employee versus an independent contractor case should not have been made as forcefully as it was, if at all, unless counsel could distinguish the earlier cases on the point or explain why they were incorrect, which was not done.”

Justice Boyle also said that there was “frankly no possible merit to the contrary position in a case such as this”. G & J Muirhead Holdings is an informative read for those looking for guidance with the personal services business designation.

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Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.