Section 125

In the two taxation years in question, non-residents held 60%, then 70%, of the voting (Class A) shares of the taxpayer. However, provisions of the unanimous shareholder agreement (USA) divided the holders of the Class A shares into three groups (A, B and C), with each group only entitled to vote for a specified number of directors. Accordingly, the non-residents had the right to appoint only three of the seven directors, then subsequently four of the eight directors.

The Tax Court found that, as the Canada Business Corporations Act deemed any share transferee to be bound by a USA, it followed that, if all the non-resident shareholders had sold their shares to the notional particular person referred to in para. (b), that particular person would be subject to the same voting restrictions under the USA. The Crown did not challenge this point in the Federal Court of Appeal decision summarized above.

Paris J. found (at p. 600) that paragraph (b) of the definition "was not intended to require an attribution of the ownership of shares of a corporation to a hypothetical shareholder in the case where all of the shares of the corporation are already owned by a single shareholder". Accordingly, paragraph (b) did not apply to a wholly-owned subsidiary of a public corporation whose ultimate control was by a group of Canadian resident individuals.

A non-resident shareholder of the taxpayer, who owned one-half of the taxpayer's shares and, by virtue of being chairman, was entitled pursuant to the by-laws to have the casting vote in the event of a tie vote, thereby had control of the corporation within the extended meaning of s. 256(5.1) and also had de jure control by virtue of such rights. Paris J. stated (at p. 224) that "the legal effect of a casting vote provision in the by-laws would not be negated by Malone's alleged ignorance of the provision".

The Minister took the position that the taxpayer ceased to be a Canadian-controlled private corporation on July 17, 1990 when it completed an initial public offering of its common shares through the NASDAQ stock exchange in the United States, as a result of which a majority of its shares were owned by non-residents of Canada. The Federal Court of Appeal had held in Silicon Graphics Ltd. v. The Queen, 2002 DTC 7112 that the taxpayer was an CCPC throughout its 1992 and 1993 taxation years. There was no evidence that the non-resident shareholders of the taxpayer acted differently in 1990 after July 17 than they did in 1992 and 1993. Accordingly, the taxpayer was not a CCPC after July 17, 1990.

The holding by the taxpayer of substantial term deposits for the future purchase of business premises was "only a collateral purpose ... and the withdrawal of the fund would not have 'a decidedly destabilizing effect' on the taxpayer's operations" (p. 536). Accordingly, interest on the term deposits did not pertain to and was not incident to the taxpayer's active business.

Funds that were surplus to the day-to-day requirements of the taxpayer's concrete business were invested by it in interest-bearing term deposits. Sarchuk J. stated:

"I am not satisfied that the evidence adduced establishes a financial relationship of dependence of some substance between the term deposits and the active business carried on by the appellant or that the appellant relied on the term deposits as an integral aspect of its business operations ... There is no cogent evidence as to the amount of cash reserves required on an ongoing basis, e.g., for truck replacement."

Similarly: Transport Lacté Inc. v. MNR, 89 DTC 606 (TCC)

The taxpayer ("CJ") was a Canadian corporation owned by an engineer ("McCarty"), his wife and their daughter. CJ entered into a series of three "consulting contracts" with a third party ("MEG") for the provision of management services respecting a substantial construction project for hourly fees. In finding that CJ's business was not a personal services business, Lyons J noted that

• "there was no meaningful degree of control by MEG over Mr. McCarty's work activities" (para. 52) after accepting (at para. 51) the testimony of McCarty that "he was told to ‘go build it'…but was not told what to do nor how to accomplish the desired results."
• CJ could have worked for third parties but provided services solely to MEG because of the scale of the project and the demands on Mr. McCarty's time (para. 55) so that the services CJ provided were "not integral to MEG's business" (para. 57).
• Respecting chance of profit and risk of loss, an hourly pay scale was common in the business, there were no fringe benefits or stock options, there were sometimes significant delays in payments for CJ's services, there was an expectation of performing warranty work and there was a risk of being sued

Until 1995, a Quebec garbage collection company ("EBI") employed its garbage collectors and drivers. It then encouraged most of them to each become the sole shareholder and director of a newly incorporated Quebec company with nominal capitalization, so that EBI entered into contracts with each company for the provision of the services of the individuals which previously had been provided directly. These arrangements were terminated after CRA reassessed.

After stating (at paras. 59-60, TaxInterpretation translation) that "under Quebec civil law, the existence of a relationship of subordination is essential to finding a contract of service," and that "there is subordination if the payer has the ability to determine how the work is executed," Favreau J noted (at para. 62) that the Wiebe common law tests can be used in the Quebec context as they are non-exhaustive indicators of control.

Here, the individual companies carried on personal services businesses, so that the deduction of various expenses was properly denied. EBI exercised the same daily control of the individuals' activities after the change as before (and subsequently, after the new arrangements were terminated) through detailed daily reporting, detailed monitoring by its foremen and strict controls on how its trucks (which were owned by EBI) were utilized and parked – as well as the individual corporations themselves being administered by EBI's accountants for a fixed fee and having the same address as EBI. (The identity of the tasks performed before ad after also showed "integration.") There was minimal prospect for gain or loss (with the net income of the individual companies essentially the same as the employees' income previously) and with a prohibition against using EBI trucks for another company.

The taxpayer was owned by its sole employee ("Muirhead") and his wife, and provided well inspection services to an arm's length corporation ("Harvest") under a services contract with it.

The taxpayer had a personal services business – but for the services contract, Muirhead would have been a Harvest employee. Muirhead had regular work shifts charged out at an hourly rate, and the taxpayer's provision of equipment (a truck that Muirhead also used outside of the job, personal tools, and flame-retardant clothing, but not key specialized tools) was not beyond what might reasonably be expected of an employee. Harvest was the only client, and Muirhead the only employee. Respecting the taxpayer's right to an overtime rate of an additional $17 per hour, Boyle J stated (at para. 31) that instead "clients and customers of a business normally seek to negotiate volume discounts, not volume surcharges."

The intentions of the parties to the services contract were irrelevant "as the personal services business provisions would be meaningless if the intention of the third party purchaser of the services (Harvest) and the individual's corporation ... in entering into their contract governed, as that contract can only be a contract for services" (para. 7).

Bédard J found that the taxpayer, wholly owned by an individual ("Almeida"), was operating a personal services business, given that:

• the taxpayer's compensation was limited to $69.33 per hour that Almeida worked;
• the taxpayer's two clients provided the tools; and
• Almeida was closely controlled by the clients, including that he could not choose where to work and that he reported to a team leader.

The taxpayer's director ("Mr. Gitman") and his two sisters inherited equal interests in a number of rental properties and a business, which they held in a "de facto partnership." The partnership's properties and business were managed principally by the taxpayer, which was owned, operated and staffed solely by Mr. Gitman, in consideration for an annual fee of $150,000. The partnership was its only client. The taxpayer claimed small business deductions in three consecutive taxation years. The Minister denied the deductions on the basis that the taxpayer's management activities were a "personal services business" under s. 125(7), and therefore it was not engaged in an "active business carried on by a corporation."

Bédard J. affirmed the Minister's position. But for the existence of the taxpayer, Mr. Gitman would have been working directly for the partnership in a function that was an "office," given that he held "a subsisting , permanent, substantive position which had an existence independent of the person who filled it" for which he "was entitled to a fixed remuneration" (para. 48). Although it was "well established that a partner cannot be an employee in his own partnership" (given that the control of a partner in the partnership business is inconsistent with the subordinate character of the employment relationship) (para. 27), the same restriction did not apply here as "an 'office' ... does not require the individual to be in the service of some other person" (para. 28).

The principal salesmen and purchasing agents for a brokerage corporation whose business was transacting in cedar shakes and shingles established a partnership of which corporations of which they were specified shareholders were members, in order to continue carrying on these purchase and selling functions. In finding that the corporations did not carry on personal services businesses, Webb, J. noted that the individuals (through their corporations) were given significant latitude and independence with respect to the performance of the services and that the manner in which the partnership was compensated (a share of adjusted gross profits of the brokerage corporation) meant that the partnership had an opportunity for profit and the possibility of incurring losses. The fact that the individuals continued as directors of the brokerage corporation and therefore were employees, was not relevant to the question whether their corporations carried on personal services business in respect of the services provided by the partnership.

The individual taxpayer was the sole shareholder of the corporate taxpayer ("RREL") which, in turn, provided the engineering services of the taxpayer to a corporation ("SRAL") of which RREL owned 25% to 30% of the shares. In finding that the corporation did not carry on a personal services business, V.A. Miller, J. noted that SRAL only became involved in the proposal after Robertson had acquired the engineering contract, that Robertson only worked on contracts that he had generated, that RREL's share of profits of SRAL was determined by the amount of money that he brought into SRAL and that the contract between RREL and SRAL did not require the individual taxpayer to work any particular number of hours.

The taxpayer was not carrying on a personal services business given that in addition to five full-time employees it had two part-time employees.

A corporation ("9043") of which an individual was the sole shareholder, officer and employee, and which was retained by a contractor of Hydro Quebec ("Sodéfi") to provide the services of the individual as a computer programmer to Hydro Quebec, was found to be carrying on a personal services business on the basis that, but for the existence of 9043, the individual would have provided services to Hydro Quebec as a subcontractor of Sodéfi and given that there was a relationship of subordination between the individual and Hydro Quebec that was sufficient to establish that under the Civil Code of Quebec the individual would have been viewed as an employee of Hydro Quebec. Although Hydro Quebec could exert little control over the way in which the individual conducted the work, given his level of skills and expertise, he nonetheless was subordinate on the basis of his mandatory presence at assigned places of work in accordance with a scheduled established by Hydro Quebec (in order that he could communicate with other Hydro employees) and in light of the imposition of rules of conduct on him (i.e., providing advance notice of any absences because of illness or taking leave).

The taxpayer was owned by an individual ("Pletch") and his wife. Pletch served as the president and then as vice-president and director of a company ("Thyssen"), and the taxpayer provided the services of Pletch to Thyssen for management fees. In finding that the taxpayer carried on a personal services business, Hershfield J. found that (given the flexibility of some of the arrangements between Thyssen and Pletch), some of the services of Pletch provided by the taxpayer to Thyssen could be characterized as advisory services, there was no allocation of the compensation paid to the taxpayer wearing its "advisory hat" and "executive hat", and that the services of the taxpayer had been merged into one source of income viz., compensation for performing the role of senior executive.

The taxpayer, through its key employee, provided sales and purchase services to two companies engaged in the manufacture of knitted garments and the supply of textiles and yarn. If the taxpayer did not exist, the individual could reasonably be regarded be regarded only as an independent contractor rather than as an employee of the two companies. The taxpayer bore the cost of equipment, its compensation took the form of commissions, the employee received no fringe benefits from the two companies, and he was not subject to any meaningful degree of control by them. Accordingly, the taxpayer did not carry on a personal services business.

The sole shareholder ("Ross") of the taxpayer served as the CFO of a Canadian company ("Clearly Canadian") and also performed services on behalf of the taxpayer for Clearly Canadian. The taxpayer was found not to have a personal services business given that the compensation received by Ross from Clearly Canadian was for the running of clearly Canadian on a day-to-day basis and that the consulting fees paid to the taxpayer were for duties that normally consultants would have been hired to perform. In addition, the taxpayer rented at its own expense the necessary business tools from Clearly Canadian, incurred various operating expenses, did not obtain any limitation on claims for negligence that Clearly Canadian might make against it and obtained compensation (in the form of stock options) for services provided by it to third parties.

The shareholder of the taxpayer, who previously had been a partner in a law firm providing, or supervising the provision of, the bulk of legal services required by a Canadian public corporation ("Clearly Canadian") became a vice-president in Clearly Canadian as well as the sole employee of the taxpayer. Thereafter, all the consideration paid by Clearly Canadian for the services of the taxpayer was satisfied by the payment of fixed monthly amounts to the taxpayer pursuant to a "legal services agreement".

Given the findings in Criterion Capital Corp. v. The Queen, 2001 DTC 921 (TCC), the taxpayer likely would have been successful in establishing that it did not have a personal services business if all administrative services had been provided by the individual in his capacity of vice-president of legal services, and all legal services had been provided by the taxpayer through its employee (the individual). However, the relevant agreements indicated that both administrative and legal functions had been transferred to the taxpayer, with the result that it provided administrative services that were to have been performed by the individual. Accordingly, the taxpayer carried on a personal services business.

A business of providing construction cost appraisal services, which the taxpayer provided to a corporation through the services of its president and principal shareholder, represented a personal services business, given that such individual might reasonably be regarded as an employee of the recipient of the services.

An officer and specified shareholder of the taxpayer who provided services to a partnership through an office in her home would not have been considered an employee of the partnership in the absence of the incorporation of the taxpayer given the presence of remuneration risk (her remuneration was not determined until after the end of each year in which she performed the services), the inexactitude of that remuneration, and the fact that she provided her own workplace and provided her management skills without any direct controls on how she performed her tasks. Furthermore (p. 466):

[A] partner cannot be an employee of a partnership that is capable of entering into a contract of employment with the partnership and as a consequence an incorporated employee could not become an employee of a partnership [of which] the incorporated employee was a partner.

The taxpayer, through the services of its shareholder, prepared advertising brochures and folders for various clients, and had the printing work done exclusively by a corporation ("Bourguignon") of which the shareholder previously had been styled an employee prior to the incorporation of the taxpayer. In the absence of the taxpayer, the shareholder would not have been an employee of Bourguignon given various indicia of an independent contractor including the absence of any control or supervision by Bourguignon, the payment of rent by the taxpayer to Bourguignon for the occasional use of a small office at Bourguignon's premises, the payment of often substantial sums by the taxpayer to Bourguingon for overtime or to speed up the production of certain projects in order to meet the taxpayer's business objectives, and the undertaking of other projects with other printers or with a printshop purchased by the taxpayer, following the termination of the business relationship between the taxpayer and Bourguignon. These factors outweighed the billing of the customers by Bourguignon alone (followed by the payment of a 10% commission to the taxpayer) and the fact that essentially the same relationship was described as one of employer-employee prior to the incorporation of the taxpayer.

The voting preferred shares of the taxpayer were held by Mr. McDonald and its common shares were held by his wife and children. In finding that if the taxpayer had never existed, it would not be reasonable to regard Mr. McDonald as an officer or employee of a footwear distributing company ("Status") to which the taxpayer had contracted to provide consulting services, Mogan J. noted that in the years in question, Mr. McDonald was not working on a full-time basis for Status and the taxpayer was engaged in its own shoe distribution business selling to small retailers, Mr. McDonald was not under the control of any senior officer of Status but instead reported to a shareholder, and Mr. McDonald had enough experience, knowledge and goodwill to engage in the business of importing shoes into Canada on his own (i.e., he had the capacity to engage in the particular business on his own account).

The taxpayer, which purportedly provided services to the third-party customers of the plumbing business of a corporation ("BPH") owned by the husband of the taxpayer's shareholder was found to provide those services instead to BPH given that the third-party customers were not even aware of the existence of the taxpayer and there was no other evidence to indicate that there was any contractual arrangement between the taxpayer and the customers. Accordingly, but for the existence of the taxpayer, its shareholders would have been an employee of BPH.

The taxpayer, which had two employees including its shareholder, carried on a storage unit rental business.

Before referring to the "principal purpose" test and stating (at para. 26) that "whether we substitute ‘main' or ‘chief' or primary' or ‘51%', it comes down to an objective determination of what the payor was paying for," C Miller J noted that the taxpayer provided additional services free of charge, mostly respecting assistance in moving items into or out of storage, and stated (at para. 20) that he was not satisfied that "they are indeed core to what customers were paying for." Respecting a submission (at para. 27) that there was no difference with "the motel customer paying for a room", he indicated that even a small motel would be expected to provide additional services, such as utilities (e.g. phone, electricity, Internet), daily room cleaning, linens, parking and amenities, and then stated (at paras. 28-29):

Every hotel customer has an expectation of a bundle of hotel services in addition to the use of a furnished room. I have not been convinced that every customer seeking storage space has any greater expectation than the space itself and not an expectation of a bundle of services equivalent to hotel accommodation.

There is a tipping point where the provision of services overcomes the provision of property. … [A] few services to a few customers does not change the inherent nature of income from property.

The taxpayer was carrying on a specified investment business.

The deceased taxpayer and her three children held equal interests in a bungalow ("Fairhaven"), which they rented out as a holiday property. The Inheritance Tax Act provided that, when the taxpayer died, she would be exempt from inheritance tax on the Fairhaven interest if it was "property consisting of a business or interest in a business," but that this exemption did not apply where the business consisted "wholly or mainly of ... making or holding investments." The estate contended that the taxpayer's active management of the business meant that the business was not mainly the holding of an investment. The taxpayer's activities included having the property maintained and cleaned, advertising, and decoration, as well as continually re-letting the property (virtually all stays were two weeks or less).

The Upper Tribunal reversed a finding by the First-tier Tribunal that the investment business exclusion did not apply. As the taxpayer's interest thus represented an investment business, it was subject to inheritance tax. Henderson J. stated (at para. 42):

...I take as my starting point the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterized as an investment activity. Further, it is clear from the authorities that such an investment may be actively managed without losing its essential character as an investment....Accordingly, the fact that the Pawsons carried on an active business of letting Fairhaven to holidaymakers does not detract from the point that, to this extent at least, the business was basically one of an investment nature.

Although the providing of "additional services" such as the provision of a cleaner, heating and hot water, television and telephone, and being on call to deal with emergencies, were not part of the maintenance of the property as an investment:

The critical question, however, is whether these services were of such a nature and extent that they prevented the business from being mainly one of holding Fairhaven as an investment. (para. 45)

The answer was negative (at para 46):

[T]here was...nothing to distinguish it from any other actively managed furnished letting business of a holiday property, and certainly no basis for concluding that the services comprised in the total package preponderated to such an extent that the business ceased to be one which was mainly of an investment nature.

The taxpayer who was the sole director and officer of a corporation ("Alland") owned by him and a family trust, lent money in order for Alland to participate over the course of 15 months in what the taxpayer thought were purchases of inventory by another corporation ("Trev Cor"), with Alland to receive a share of the profits from resale of the inventory. In fact, Trev-Cor was engaged in a pyramid scheme so that few or none of the transactions actually occurred. Given the active involvement of the taxpayer in determining whether Alland should participate in the transactions and the fact that the transactions were found to be joint venture transactions with Trev-Cor, Alland was not engaged in a specified investment business, so that the losses sustained by the taxpayer on his loans to Alland were business investment losses.

A corporation whose business was the operation of a 68-pad mobile home park on land which it owned was found to be carrying on a specified investment business notwithstanding the high level of service and superior maintenance standards which it offered to the tenants. Its clear purpose was to derive rental income from the tenants who occupied the pads.

Margeson TCJ. found (at p. 1225) that janitors "who worked all or substantially all of four hours per day, five days a week, throughout the years in question" would qualify as "full-time employees", but went on to find that there was insufficient evidence that there were more than five such full-time employees for those years.

A corporation that derived virtually all its income from the rental of a shopping centre owned by it was found to be engaged in a specified investment business. Bell TCJ. noted (at p. 892) that the "jurisprudence distinguishing income from business and income from property is of little or no assistance here" and that the definition of specified investment business "sets up an entirely new test, namely, whether the principal purpose of the business is to derive income from property". Accordingly, it was not relevant that, in the absence of this definition, the corporation might be considered to derive income from a business rather than income from property. Consequently, the shares of the corporation were not qualified small business corporation shares.

A sum of $5 million was injected into the taxpayer with a view to being utilized in leasing activities. The portion of the sum that the taxpayer was unable to so deploy and instead invested gave rise to Canadian investment income for purposes of s. 129(1).

A corporation owned by the taxpayer and his wife that did a high volume of trading in securities on the Vancouver Stock Exchange was found to be a small business corporation. The fact that the gains and losses were reported on capital account was not sufficient to justify a conclusion that the transactions were on capital account.

A practising lawyer who spent approximately 28 hours per year on telephone calls monitoring the business of the taxpayer in addition to making occasional visits to the taxpayer's office in consideration for annual remuneration from the taxpayer of $8,250 did not qualify as a "full-time employee".

Strayer J. also found that the reference to "more than five full-time employees" meant "at least six" full-time employees.

The business of the taxpayers which consisted of providing mortgage financing on the security of second, third and fourth mortgages was found to be a specified investment business given that the number of full-time employees engaged by each of the taxpayers during the relevant taxation years did not exceed five.