CRA Loses On Personal Services Business Rules

C.J. McCarty, was a specified shareholder/employee of the company, C.J. McCarty, Inc, (CJ,Inc.); he had only one client over a three month period of time, MEG Energy Corporation (MEG) and he received a fixed hourly rate for his services as the construction manager of a major project. 

Still, CJ,Inc. recently fought CRA’s rules on Personal Services Businesses (PSB) in the Tax Court of Canada and won. Here’s what happened when the judgement came down August 12, 2015.

CJ,Inc. was reassessed as a Personal Services Business for the 2007 and 2008 taxation years.  This meant its business expense deductions were denied and the company was could not claim its Small Business Deduction. 

Under 125(7)  a “personal services business” carried on by a corporation in a taxation year means a business of providing services where
(a) an individual who performs services on behalf of the corporation (in this definition and paragraph 18(1)(p) referred to as an “incorporated employee”), or
(b) any person related to the incorporated employee is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than five full-time employees, or
(d) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year;

The court found on appeal, that it would not be reasonable to conclude that, but for the existence of the company, Mr. McCarty would have provided his services to MEG as an employee. Rather, CJ, Inc. was found to be an independent contractor of MEG Energy Corporation, among other reasons, because:

a) MEG did not, in fact, control the working hours or other conditions of work. because the responsibilities of the work was delivered 24/7 to completion
b) MEG did not provide direction on how the work was to be completed
c) the highly specialized skills required to perform the work in the project could not be reasonably overseen by MEG; and Mr. McCarty had those skills and did the work without supervision
d) there was a risk that CJ,Inc. would not be paid; and in fact was paid late, and received no benefits or overtime
e) the company was required to obtain its own insurance on the project.

While it remains difficult to escape the label of a PSB for corporations with only one client, C.J. McCarty Inc. v The Queen reveals that it is indeed possible. The reasons cited by the judge are important for future cases with similar scenarios.

Greer Jacks practices law in Victoria and is a regular contributor to EverGreen Explanatory Notes, and has been a guest instructor to the Distinguished Advisor Workshops which will focus on personal-corporate tax planning for small business owners this October 27 in Winnipeg, October 28 in Vancouver, October 29 in Calgary and November 2 in Toronto..

ADDITIONAL EDUCATIONAL RESOURCE: T2 Corporate Tax Preparation for Micro Businesses course and MFA Business Services Specialist Designation