CIMA 2013 TAX UPDATE PERSONAL SERVICES BUSINESS FEBRUARY 23, Presented by: Vinay Khosla, M. Acc., CA

Transcription

1 Presented by: Vinay Khosla, M. Acc., CA Bateman MacKay LLP Phone: ext. 212 Mobile: CIMA 2013 TAX UPDATE PERSONAL SERVICES BUSINESS FEBRUARY 23, 2013

2 The Small Business Deduction First $500,000 of CCPC s taxable income earned in Canada entitled to the Small Business Deduction (SBD). SBD shared amongst associated corporations SBD not applicable to: Specified investment businesses Personal Services Business

3 Personal Services Business Defined to be an individual who performs services on behalf of the Corporation Aka the incorporated employee Factors looked at by the courts in determining whether a Personal Services Business: Control Ownership of tools Chance of profit Risk of loss Integration??? (economic dependence of contractor/employee) Parties intention

4 Personal Services Business Tax Implications Loss of SBD Restricted deductions (to what an employee would otherwise be allowed) Increased/Double taxation loss of Corporate rate reduction of 13% Combined Federal/Ontario Tax rate for general active business income is 26.0%. Combined Federal/Ontario for Personal Services Business is 39%. Overall tax of a PSB is then approx. 57% Given above, forget about PSBs to defer tax

5 Personal Services Business Control Degree of control employer possesses over work In employee relationships, employer typically has full control The 5 Ws + H (who, what, where, why, when, how) re: the employee and how they are to perform their job. aka the Employee Handbook

6 Personal Services Business Ownership of Tools Tangible property Intangible tools also considered experience, intelligence, and organizational abilities Employer may be able to provide some special tools if worker owns the tools considered standard to the profession or trade Tools may be incidental for businesses that are not tool intensive (i.e: Massage Therapy)

7 Personal Services Business Chance of Profit or Loss Employers assume the financial risk Independent contractor s risk also can include opportunity cost of employment perks Benefits Job security Training/education costs Promotion Efficiency of contractor and resulting profits is a major factor

8 Personal Services Business Intention of the Parties Not in itself a determining factor Still cannot be disregarded Often reflected in the parties legal agreement

9 Personal Services Business Intention of the Parties Taxpayers were employees of Global Postal Consulting Inc. ( GPC ) and owned the shares of GPC 50/50 GPC formed since customers preferred dealing with a company GPC was intended to be profit neutral and stated objective was the keep lowest admin costs possible for GPC and no payroll. No income declared on GPC T2 Taxpayers had consulting agreement with GPC with the stated intention that they are consultants and not employees

10 Personal Services Business Intention of the Parties cont d The four-in-one test developed in Wiebe Door includes the following factors: Control Ownership of tools Chance of profit Risk of loss (sometimes (c) and (d) are combined) Integration. Judge ruled that applying Wiebe Door Taxpayers were independent contractors: No supervision or control over execution of contracts Taxpayer bore chance of profit and risk of loss He supplied his own tools/equipment No job security Free to take on other jobs/contracts Judge looked closely at intention which also pointed towards independent contractor

11 Any Questions?

12 Thank You! Vinay Khosla, M. Acc., C.A. Tax Partner Bateman MacKay LLP Village Centre Place Mississauga, ON L4Z 1V9 Phone: (ext. 212) Mobile: