Personal Services Businesses and Government IT Consultants
The Canada Revenue Agency (“CRA”) is in the process of auditing and reassessing IT contractors that provide services under long term contracts to various government departments. The CRA’s position is that these contractors were employees for tax purposes and any corporations were personal service businesses (the “Rulings”). If the Rulings stand, the Rulings will impact the IT contractors as follows. First, the CRA will remove the corporate tax rate reductions on income. Second, the CRA will deny the small business deduction. Third, the CRA will deny the expenses claimed. Last, the CRA may impose gross negligence penalties.
We are representing a number of IT contractors who have been reassessed and have objected to the Rulings. It appears that the CRA are attempting to group these objections and place these objections on hold. In the interim, the CRA has selected a few of the objections and is proceeding to the Tax Court of Canada with these hand-picked objections. We believe that – if the CRA are successful in the Tax Court – the CRA will attempt to use these hand-picked cases to persuade the other IT contractors to abandon their objections in whole or in part and consent to the Rulings. If the CRA is not successful in Tax Court, the CRA may appeal the Tax Court’s decision or take the position that these are fact-based cases and, therefore, the Tax Court’s decision is not binding on the outstanding objections.
We believe that the determination as to whether a worker is an employee, incorporated employee or independent contractor is a fact-driven determination. Although some cases are similar, they are not the same. Each case is different and an independent decision-maker should consider the unique circumstances of each case in order to make the correct determination in fact and law. In these circumstances, we believe that the CRA’s attempt to group the IT consultants’ objections and bind the IT consultants is not appropriate. In addition, the CRA’s strategy is not in the IT consultants’ best interest.
We believe that every case would benefit from an independent analysis of the IT consultants unique facts and a review of the potential strategies. This way, the IT consultant can determine whether they should wait for the conclusion of the CRA’s test cases or whether the IT consultant should forgo the objection stage (and the CRA’s attempt to hold the objection) and appeal the matter directly to the Tax Court in accordance with subsection 169(1) of the Income Tax Act.
We welcome the opportunity to meet with other IT consultants to discuss their file and recommend a custom strategy. We believe that all IT consultants interested in defending their filing positions will benefit from the application of communal knowledge to each unique case. If you are interested, please contact Kristina Anderson at 416.218.5263 ext 112 or firstname.lastname@example.org to schedule a consultation.