5-8143
M. Eisner
Tel. (613) 957-2138Dear Sirs:
This is in reply to your letter of May 23, 1989 concerning whether a corporation would be regarded as carrying on a "personal services business" as defined in paragraph 125(7)(d) of the Income Tax Act in the following hypothetical situation:
1. X Ltd. has a hiring freeze. However, it would like to engage the services of an individual to complete a specific project on a contract basis.
2. Consulting Ltd. would like to undertake this project. Consulting Ltd. is a newly incorporated company which is 100% owned by Mr. A. Mr. A is also the sole employee of Consulting Ltd.
3. X Ltd. and Consulting Ltd. enter into a consulting agreement with the following terms and conditions:
(a) Consulting Ltd. would be engaged on a full-time basis
to complete the project within a two-year time period; (b) Consulting Ltd. shall be paid a consulting fee of
$7,000 per month for the 24 months of work; and (c) X Ltd. will provide an office to the contractor.
However, most of the consultant's work will be
performed outside the office.The issue in the above situation in relation to paragraph 125(7)(d) is whether Mr. A. can reasonably be regarded as an officer or employee of X Ltd. on the presumption that Consulting Ltd. does not exist.
In considering the situation, you have referred to the Wiebe Door Services Ltd. case (1986 CTC 200) in which the tests of control, ownership of tools, chance of profit or risk of loss, and integration were mentioned as those that could generally be used to resolve an issue such as that described above. In applying these tests, you feel that it is uncertain whether Mr. A. would reasonably be considered to be an "employee or officer" of X Ltd. and you have mentioned that Mr. A. could never have been an employee of that company due to the hiring freeze. In such circumstances, it is your view that Consulting Ltd. would not be considered to be a personal services business under paragraph 125(7)(d).
From the limited information you have provided, it is not possible to provide you with a conclusive answer. Nonetheless, the nature of the services to be provided to X Ltd. by Mr. A. would seem to indicate that those services would be integrated into X Ltd. In particular, it seems that Mr. A. could have a high degree of involvement with x Ltd. employees. However, before more informative comments could be provided, it would be necessary to have further details concerning the functions of X Ltd. in relation to the project and a copy of the consulting contract. We are also noting that in a situation such as that outlined above, it appears to us that the integration test could be very persuasive in determining whether Mr. A., in the absence of Consulting Ltd., could be regarded as an employee or officer of X Ltd.
In the Moose Jaw Kinsmen Flying Fin Inc. case (88 DTC 6099), the Federal Court of Appeal commented that relying only on the four tests referred to in the Wiebe case was the wrong approach. It is necessary to examine all the facts of the alleged employment relationship. For example, the circumstance that X Ltd. is providing facilities to Mr. A. may indicate that an employee-employer relationship exists.
With respect to the control test, it appears to us that in the above scenario, there might be a sufficient degree of control to indicate an employer-employee relationship. For example, since fact 3(a) indicates that Mr. A. is required to devote his full time to X Ltd., Mr. A. could be practically or contractually restricted from performing other consulting services on behalf of Consulting Ltd. and Mr. A., through Consulting Ltd., may be compelled to account for his actions. In addition, as it seems that Mr. A. is required to personally perform the services to be provided by Consulting Ltd., it appears that X Ltd. was concerned with the manner in which the services would be provided.
In summary, it appears to us that it is quite possible that a good case could be made that an employer-employee relationship exists for the purposes of the definition of "personal services corporation" under paragraph 125(7)(d).
You have also asked us whether our conclusion would change in the event that the scenario was altered in six different ways. As we were not able to provide a definite conclusion, we make only the following general comments.
1. If Mr. A. had previously been an employee of X Ltd., it is our view that this could be an indication of an employer-employee relationship.
2. The same factors would have to be considered if Mr. A. provided the services in the capacity of an individual rather than through Consulting Ltd.
3. Whether the circumstance that the consulting contract was extended or could be extended would make any difference to the analysis would depend on all the facts of the case.
4. If Mr. A. were to derive 15% of his consulting income from other sources, this fact may be an indication that no employee-employer relationship exists. It is, of course, possible for an employee to have two employers, or one employer and still do free-lance work on the side.
5. The fact that Mr. A. might derive 50% of his consulting revenues from other sources would be a stronger indication that an employee-employer relationship does not exist. However, in our view, Mr. A. could nevertheless be regarded as an employee due to other factors.
6. With respect to the situation where Mr. A. would be supervising the engineering Department for the purposes of completing one specific project we refer you to our initial comments. We also note that, since the engineering department would be comprised of employees of X Ltd., the degree of integration of Mr. A's services with the business of X Ltd. and the degree of control exercised by X Ltd. over Mr. A. would probably be much greater.
We trust these comments are of assistance.
Yours Truly,
For Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch