It is true that if a business is determined by the CRA to be a personal services business, amongst other adverse tax implications, its income would be disqualified from being eligible for the small business deduction. The definition is found in subsection 125 of the Income Tax Act:
“personal services business” carried on by a corporation in a taxation year means a business of providing services where
(a) an individual who performs services on behalf of the corporation (in this definition and paragraph 18(1)(p) referred to as an “incorporated employee”), or
(b) any person related to the incorporated employee is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an
officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation, unless
(c) the corporation employs in the business throughout the year more than five full-time employees, or
(d) the amount paid or payable to the corporation in the year for the services is received or receivable by it from a corporation with which it was associated in the year;
This somewhat complex and technical definition requires an clear understanding of who the “person or partnership to who or to which the services were provided but for the existence of the corporation” is. That person should be the brokerage.
Generally, that means it is important you not be in a relationship or act in such a way that causes you to “be regarded as an officer or employee” of the brokerage or their clients. We expect that the majority of REALTORS® intend to be independent contractors and not “employees” of their brokerages.If you are not clear whether you are or not, you should consult a lawyer.
There may be some of you who are officers or employees of your brokerage or client(s) for legitimate reasons and your lawyer and accountant should work through the consequences and potential changes to your status with you. You may need to weigh the advantages of being an officer or employee against any potentially advantageous tax advantages.
What can be confusing is the use of the word “employee’ in that subsection. This is because TRESA and the Regulation also use the word “employ” in describing the relationship between REALTORS® and their brokerages. The specific definition in TRESA of that word “employ” is very specific and does not necessarily require a
REALTOR® to be an “employee” within the meaning of subsection. It encompasses REALTORS® being an independent contractor.
Whether you are an “employee” or independent contractor depends on how your various contracts are structured and many other aspects of your business activities. That should not be a new issue for most of you and you should continue to work with your tax advisors to ensure you qualify for the tax status desired.