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Specified Investment and Personal Services Businesses
The SBD is generally available to any Canadian Controlled Private Corporation (CCPC) whose income is less than $15 million. The two major exceptions are specified investment businesses and personal services businesses.
The tax department implemented legislation to stop taxpayers from moving their investments into holding companies where the income would be taxed at lower rates due to the SBD. The result is the denial of the SBD to specified investment businesses.
A specified investment business is a business which principally derives income from property (includes interest, dividends, rents and royalties), except those with "more than five full time employees throughout the year". There have been many court cases arising from CCRA audits over this issue, and some points to keep in mind are:
- Principally means 50% or more. You might hear of "purifying" a corporation by divesting it of property income sources and leaving only income sources from active business. This is usually done for other tax reasons involving eligibility for the capital gains exemption for qualifying CCPC shares.
- If the corporation normally is engaged in active business, and temporarily has a large amount of income from property in one period, the corporation does not become a specified investment business on that account alone, and the income from property is classed as active business income.
- "More than five full time employees" has usually been interpreted by the courts (and the tax department) to mean 6 or more full time employees. Interestingly, in a recent higher level court case (Lerric Investments Corp. v. The Queen, FCA 2001) the judge indicated that he felt that the act might be satisfied by five full time employees and one part time employee.
- Full time employees must be just that, they must be occupied full time with supervising or managing the corporation's property business.
- A corporation that derives income from property from an associated corporation that deducted that amounts from active business income is deemed to be receiving active business income. A common example is a holding corporation that rents a building, or equipment, to an operating subsidiary corporation. This rental income then would qualify as active business income.
At one time, it was a very attractive plan for executives to resign from a company and form a corporation which then contracted to supply the executive's services to the old company. The corporation would claim the SBD and the executive end up paying much less tax than when employed directly. The tax department's answer was to implement legislation denying the SBD to "personal services businesses".
A personal services business is a corporation where a "specified shareholder" provides services to another business and the shareholder can reasonably be regarded as an employee of the business. A specified shareholder is one who owns not less than 10% of the shares of the corporation. Not only is the corporation denied the SBD, it is also denied the deduction of all but a very few expenses. Generally, the only expenses that may be deducted are those paid as salary or wages to the specified shareholder and other expenses that would normally be deductible against employment income, ie. travel expenses incurred to earn employment income.
For an up-to-date list of the medical expenses that are deductible contact the office of J. A. Smith & Associates.
Joyce Smith is president of JA Smith & Associates Inc. Certified General Accountants and Certified Financial Planners. The firm offers financial and tax planning advice for both individuals and business.
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