Requirements of personal services business were not met

Taxpayer, private corporation controlled by wife, entered into management services agreement with company controlled by husband for provision of various financial and administrative services. Wife was full-time employee of company, but in 2010, she and four other full-time employees of company transferred to being full-time employees of taxpayer while continuing to work in company’s office and to carry out same duties that they had performed as employees of company. Taxpayer reported revenue of $330,000 in 2009 taxation year and $837,622 in 2010 taxation year, all of which originated from company, and claimed expenses including advertising, interest, office expenses, professional fees, and vehicle expenses, as well as small business deduction. Minister reassessed taxpayer under Income Tax Act on basis that it was precluded from claiming specified expenses and small business deduction because it carrying on personal services business during 2009 and 2010 taxation years. Taxpayer appealed. Appeal allowed in part, for 2009 taxation year . In 2009, taxpayer had no employees and wife did not provide any services on its behalf so requirements of personal services business were not met. In 2010, wife would reasonably have been regarded as employee of company but for existence of taxpayer, given negative inference drawn from taxpayer’s failure to call her or any of its other employees to testify. It was clear that taxpayer and wife were not carrying on services business on their own account but rather business that was focus and raison d’etre of their activities was business of company. Independent contractor engaged by taxpayer in 2010 did not satisfy requirement of having more than five full employees so as to fall within exception set out in personal services business definition as that only related to employees and not any other form of service providers. Taxpayer was not precluded from claiming small business deduction and expenses totalling $7,126 in respect of 2009 taxation year, but appeal in respect of 2010 taxation year would be dismissed.

Arora Trading Ltd. v. The Queen (2019), 2019 CarswellNat 1531, 2019 TCC 98, Henry A. Visser J. (T.C.C. [General Procedure]).

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