5-9531
Dear Sirs:
Re: Paragraph 125(7)(d) of the Income Tax Act (Canada) (the "Act")
This is in response to your letter of January 31, 1990 in which you requested our interpretation of the definition of personal services business in paragraph 125(7)(d) of the Act in the context of the hypothetical situation described herein.
Assumptions
You have asked us to assume that two individuals ("T" and "Z") are specified shareholders, within the meaning of subsection 248(1) of the Act, of a Canadian-controlled private corporation ("X Co") which carries on an active business in Canada. Y and Z render management services to X Co on a fee-for-service basis (the "management services"). You have asked us to assume that Y and Z are not employees, for purposes of the Act, by virtue solely of the rendering of the management services. Y and Z are also directors of X Co and receive fixed directors' fees for their services in this capacity.
Each of Y and Z incorporates his own corporation ("Y Co" and "Z Co") and is the only shareholder and employee of such company. Y Co and Z Co. through their agents, Y and Z, continue to provide the management services to X Co which were previously provided directly by Y and Z.
Opinions Requested
You have requested that we confirm that Y Co and Z Co would not be considered to carry on personal services business. You are of the view that Y and Z, the incorporated employees within the meaning of paragraph 125(7)(d), would not reasonably be regarded as employees of X Co but for the existence of Y Co and Z Co because if the management services were provided directly by Y and Z, such provision would be in their capacity as independent contactors and not employees. You note that Y and Z would be employees, by virtue of the definitions of "employee" and "office" in subsection 248(1) of the Act, of X Co by virtue of being directors of that corporation. However, you are of the view that as their status as employees is not related to the provision of the management services, such status should not affect the determination of whether Y Co. and Z Co carry on personal services businesses.
Opinions
In our view, the words of paragraph 125(7)(d) are clear and unambiguous. The provision does not require, in the hypothetical situation presented, that the incorporated employee would reasonably be regarded as an officer or employee of X Co with respect to the services being provided to X Co., but rather only requires that the incorporated employee would reasonably be regarded as an officer or employee of X Co.
As you note, in the hypothetical situation presented, Y and Z, the incorporated employees, are employees of X Co and would be employees of X Co. but for the existence of Y Co. and Z Co. Accordingly it is our view that each of Y Co and Z Co would be considered to be carrying on a personal services business unless either of the exceptions in subparagraph (iii) or (iv) is met.
The comments contained herein are only expressions of opinion given in accordance with paragraph 21 of Information Circular 70-6R2, dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch