Principal Issues: [TaxInterpretations translation] Is it possible for a PSB [personal support business] to have more than one corporate employee? In the example above, would it be possible to conclude that the two individuals are incorporated employees and that in this case both salaries are deductible?
Position: A corporation may carry on a PSB even if it has more than one incorporated employee, to the extent that the following provisions apply to each of those employees:
- each incorporated employee is a specified shareholder of the PSB, as that expression is defined in subsection 248(1). Generally, a specified shareholder of a corporation is a shareholder who, directly or indirectly, at any time in the year, owns at least 10% of the issued shares of a particular class of the capital stock of the corporation;
- each incorporated employee provides services on behalf of the PSB to a person or a partnership;
- had it not been for the existence of the corporation carrying on a PSB, it must be reasonable to consider each incorporated employee to be an officer or employee of the person or partnership to whom the services are rendered.
In the example above, a corporation that carries on a PSB will be able to deduct the salaries of both trucker spouses if both spouses are considered to be incorporated employees of the corporation.
Reasons: The Income Tax Act
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 19
PSB and the concept of “incorporated employee”
On many occasions, the CRA has adopted positions on the deductibility of certain expenses incurred by a corporation carrying on a "personal services business" ("PSB"). Among others, Technical Interpretation 2009-0320491E5 dated August 4, 2009 states that the salary paid to the spouse of an "incorporated employee" is not deductible in computing the income of a corporation carrying on a PSB. In that interpretation, the spouse provided services only to the PSB.
However, it is not uncommon to see two spouses working together for the same corporation. For example, two people who are spouses could provide trucking services on behalf of a corporation operating a PSB to the same third party ("external services"). In addition, each would take care of certain internal tasks of the PSB ("internal services"), for example, the maintenance and repair of trucks, keeping trip records and accounting.
The definition of personal services business in subsection 125(7) states that an individual who performs services "on behalf of the corporation" is an "incorporated employee". Under paragraph 18(1)(p), the salary paid to a corporate employee is deductible in computing the PSB's income.
Questions to the CRA:
Is it possible for a PSB to have more than one corporate employee? In the example above of the two trucker spouses, would it be possible to conclude that the two individuals are incorporated employees and that in this case both salaries are deductible?
CRA Response
A corporation carries on a PSB to the extent that the specified shareholder of the corporation provides services on behalf of the corporation to a person or partnership. It must be reasonable to conclude that, had it not been for the existence of the corporation, the specified shareholder of the corporation operating the PSB would be an officer or employee of the person or partnership to whom the services are rendered. A person who provides services on behalf of the corporation carrying on the PSB is commonly referred to as an "incorporated employee". For the current purposes, we have assumed that paragraphs (c) and (d) of the definition of "personal services business" are not applicable.
In our view, a corporation could carry on a PSB even if it has more than one incorporated employee, to the extent that the following provisions apply to each of those employees:
- Each incorporated employee is a specified shareholder of the PSB, as that expression is defined in subsection 248(1). Generally, a specified shareholder of a corporation is a shareholder who, directly or indirectly, at any time in the year, owns at least 10% of the issued shares of a particular class of the capital stock of the corporation;
- Each incorporated employee provides services on behalf of the PSB to a person or a partnership;
- Had it not been for the existence of the corporation carrying on the PSB, it must be reasonable to consider each incorporated employee to be an officer or employee of the person or partnership to whom the services are rendered.
Thus, in the example above, a corporation that carries on a PSB will be able to deduct the salaries of the two trucker spouses if the two trucker spouses are considered to be incorporated employees of the corporation.
François Bordeleau
(613) 957-8972
2011-041187