Canada: Are You Walking Into A Tax Disaster – Incorporated Contractors & Taxes (Part I)

Last Updated: March 5 2014
Article by Kenneth Keung

The Tax Court of Canada ("TCC") decision in G&J Muirhead Holdings Ltd. v Queen, released on February 13, 2014, dealt with whether a one-person service company was carrying on a personal services business ("PSB"). Although the decision did not represent any shift in judicial thinking on the subject, it is nonetheless useful in clarifying the role of subjective intention in PSB determination and serves as a stern reminder for incorporated contractors to structure their engagements with eyes wide open.

The PSB rules: Origins and implications

To appreciate the intent behind the PSB regime, we shall step back in time to 1969. While the USA was occupied with landing the first man on the moon, our courts ruled on the case of Ralph J. Sazio v MNR. Sazio was a CFL Hall of Famer who led the Hamilton Tiger-Cats to three Grey Cup championships. He also figured out that, rather than offering his coaching services to the Tiger-Cats as an employee, he could offer the same services through a corporation and benefit from lower tax rates offered by a corporate structure. The Canadian government disagreed but the Court sided with Sazio and held that the company was a properly constituted legal entity and the income belonged to it.

Having been thwarted in its attempt to stop such arrangement, the government feared for its ability to finance its operations if the masses began converting their employment into corporate service arrangements. In addition to the small business tax rate, a corporate structure also provides workers with the ability to reduce tax by income-splitting and avoid payroll withholding (a primary revenue source for the government). Therefore, in 1981, Parliament introduced the PSB regime for circumstances where a corporation is inter-posed into what would normally constitute an employee-employer relationship.

Prior to 2006, the consequence for being a PSB was that the corporation would be taxed as if the worker was employed directly by the hirer, i.e. disallowance of the small business deduction and limiting of deductions to remunerations paid to the "incorporated employee" and certain other deductions otherwise available to ordinary employees. Due to the introduction of the eligible dividend regime in 2006 and overall decline in corporate tax rates, a PSB structure became tax-efficient since it enabled a tax deferral while keeping the total tax on fully-distributed income similar to that of an employee. Finance was not keen on this tax result and redefined the definition of "full rate taxable income" in subsection 123.4(1) of the Act, effective for tax years beginning after October 31, 2011, so that the federal general rate reduction of 13% no longer applies to PSB income. This eliminated any deferral opportunity and effectively increased the fully-distributed tax rate on PSB income in Alberta to approximately 50% at the top marginal rates (compared to 39% for employment income).

Determining whether a corporation is carrying on a PSB

With limited exceptions, a PSB is a business of providing services where an individual who performs services on behalf of the corporation (the "incorporated employee") or a related person is a specified shareholder, and the incorporated employee would reasonably be regarded as an officer or employee of the hirer (as opposed to an independent contractor), but for the existence of the corporation.

Since the Act does not define an employment relationship, the determination of whether a person is an employee or an independent contractor has been frequently litigated. The ultimate test, as set out by the Supreme Court of Canada in Sagaz Industries Canada Inc., is whether the worker performing the services "is performing them as a person in business on his own account". The test traditionally focused on objective facts, in particular the ones set out by the Federal Court of Appeal (the "FCA") in Wiebe Door: the degree of control exercised over the worker, the ownership of tools, chance of profit and risk of loss, and integration (although the role of integration as a factor has been significantly reduced in later jurisprudence). However, over the last decade, the FCA began to afford more weight to the common intention of the parties (see Wolf and Royal Winnipeg Ballet). In 2013, the FCA in Connor Homes explained that the determination of employee versus independent contractor is actually a two-part test: first establish each party's subjective intent based on contractual relationship or actual behavior, then determine whether objective reality supports the parties' subjective intent.

The Muirhead case concerned an incorporated one-person oilfield services contractor¸ a phenomenon prevalent in the oil and gas and IT industries. A corporation was jointly owned by a married couple and the husband was the corporation's sole employee. The corporation entered into an operating agreement with a resource company whereby the husband, as an employee of the corporation, provided oilfield services on a full-time basis to the resource company for a set hourly rate with an increased rate for overtime. The resource company was the corporation's only client for a number of years, even though exclusivity was not required as part of the agreement. The CRA reassessed the corporation on the basis that it carried on a PSB. Counsel for the taxpayer argued against the reassessment by relying heavily on the intention as stated by the parties in the operating agreement that the relationship was to be a contract for services (rather than a contract of service inherent in an employer-employee relationship).

The TCC has ruled previously (most recently in Gomez Consulting Ltd) that, in spite of judicial development at the FCA on the employer vs contractor issue, common intention of the parties is not a relevant consideration in a PSB case. In his judgment, Boyle J. articulated the Court's rationale. Since an agreement between a hirer and corporate service provider will always be a contract for services (as a corporation can never be an employee), the definition of PSB would be rendered meaningless if the parties' common intention were taken into account because such intention would be "always present and always on the same side of the balance". Boyle J. was also clearly not impressed with the taxpayer's counsel for ignoring the TCC's jurisprudence on this issue.

With common intention discarded as a relevant consideration, the Court looked to the traditional Sagaz/Wiebe Door factors. It found the relationship to be indicative of an employer-employee relationship due to the control the resource company has over the work to be done, and the lack of a material chance for profits or loss with a one-man operation working on full-time basis. In particular, the Court noted that an increased rate for overtime hours is unusual for an independent contractor that has the right to hire subcontractors: "customers of a business normally seek to negotiate volume discounts, not volume surcharges...". The fact that the individual worker was required to provide his own protective clothing, hand tools and truck did not have any weight in the determination, as such arrangement is not uncommon in employment contracts.

The takeaway

The Muirhead decision should serve as a reminder to one-person operations that the CRA indeed pursue PSB cases. Often, many working in the oil patch and IT sectors are required by their hirers to enter into independent contractor structures. There are numerous motivating factors behind companies requiring this: avoiding the employer's portion of CPP and EI, not having to comply with provincial Employment Standards legislation, and the administrative burden of maintaining employees. Also, by requiring the workers to incorporate, the companies shift the entire payroll withholding risk to the worker's corporations (the CRA's published administrative policy is to reassess the worker's corporation rather than go after the hirer for source deductions – CRA Doc #9611625). In a lot of these situations, the worker will not meet the independent contractor test because the worker only has one 'client' and it is not realistic or practical to subcontract out the work. Such workers should routinely strip out all of the service fees as salaries to themselves (rather than attempting to deduct business expenses or to split-income with family members) so that there is no corporate income subject to the punitive PSB corporate tax rate. The ending tax result would be the same as if the worker were employed directly by the hirer, but here, the worker bears the administrative burden of maintaining a corporation and payroll, misses out on CPP/EI otherwise contributed by the hirer, and protection from the Employment Standards legislation.

Part II of our blog on this topic (to be released later this month) will discuss the strategies that incorporated contractors should consider to minimize or mitigate their risks.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Kenneth Keung
Events from this Firm
20 Oct 2018, Seminar, Vancouver, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

27 Oct 2018, Seminar, London, UK

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

1 Nov 2018, Seminar, Doha, Qatar

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

Similar Articles
Relevancy Powered by MondaqAI
Moodys Gartner Tax Law LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Moodys Gartner Tax Law LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions