5-912944
Re: Incorporation of Your Business
We are writing in reply to your letter of October 23, 1991 and a subsequent telephone conversation 19(1) Albert) wherein you requested our comments on whether your business qualifies for incorporation from a taxation standpoint and on whether it qualifies for the small business deduction.
24(1)
Our Comments
Basically any business can be incorporated and, although the Income Tax Act (the "Act") does not contain any conditions for determining whether a business qualifies for incorporation, the resultant tax aspects should be considered along with the commercial and legal aspects before incorporation is undertaken.
Incorporation of a business results in a separate legal entity which is also taxed as a separate entity. The Act establishes a special low rate of tax on the income of a Canadian-controlled private corporation from an active business carried on in Canada by way of an annual tax credit referred to as the small business deduction. An 'active business carried on by a corporation' means any business carried on by a corporation other than a specified investment business or a personal services business. Whether or not a particular corporation is a personal services business is a question of fact to be determined from an examination of all the facts. However, the Act provides that a corporation is considered to carry on a personal services business if among other factors an individual performs services on behalf of the corporation (the "incorporated employee") and the incorporated employee or a person related thereto owns 10% or more of the shares of the corporation and the incorporated employee would otherwise, but for the existence of the corporation, reasonably be rewarded as an employee or officer of the person who received the services from the corporation. (There are some exceptions for corporations employing throughout the year more than five full time employees and for situations where the services are provided to associated corporations). In your particular situation, determination as to whether you could reasonably be regarded as an employee of 24(1) who is the person who receives your services, would include resolution of the question of fact as to whether you had a contract of service or a contract for services with 24(1)
24(1)
Enclosed are Interpretation Bulletins IT-73R4 and IT-458R which reflect the Department's position regarding the small business deduction. Also enclosed for your information is the 1990 T2Corporate Income Tax Guide.
We trust that these comments will be of assistance.
G. Thornley for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch