The lawyers I work for -- Blair and Andre -- have this notion that I am not yet completely worldly in the ways of tax law. They think it is fun for me to write about (and you to read about) the interesting tax things I am learning. Personally, I think that they just like editing my work. For example, Andre reviewed this article and noted that the phrase “interesting tax things” is an oxymoron. My response was “how about we say, goofily complicated tax things.” Blair wiped away a tear and said “By Jove, I think she’s got it. Now, Shelley, can you give us an example?” These guys are getting way too Pygmalion with me.
Okay fellas, here’s an example. In tax law, how many is 5? No, wait how many is “more than 5?” Usually, lawyers leave such difficult math problems to the accountants. Apparently, the accountants haven’t been able to figure out the answer to this question either. Now we have a series of tax cases trying to provide an answer to that question.
Let’s start with the most recent decision, 489599 B.C. Ltd. v. MNR. Notice all the numbers in the name of the case. This is a form of dramatic presaging. 489599 B.C. Ltd. (the Appellant) provided management consulting, purchasing and administrative services. In the 2003 and 2004 taxation years, the Appellant filed its income tax returns on the basis that it was an active business and paid tax at an advantageous rate (about 20%). The Canada Revenue Agency reassessed the Appellant as a “personal services business” and applied a higher tax rate.
If the Appellant employed “more than five full-time employees”, its revenue would qualify as active business income and it would be eligible for the lower tax rate. At first glance, the math does not appear terribly complicated. But what exactly constitutes more than five full-time employees? Does it mean at least six full-time employees? Five full-time and one part-time employee is more than five but is less than six. As it turns out, the Appellant was in that nebulous middle ground: it employed five full-time employees and one part-time employee.
In earlier decisions and according to CRA publications, “more than five” was interpreted as meaning at least six full-time employees. However, those cases were addressing the issue of a “specified investment business” (not a “personal services business”). The Judge in this case disagreed with the earlier decisions and ruled that Parliament would have said “at least six” if Parliament had meant at least six. So 5 and ½ was good enough for the lower tax rate.
We now have a series of Tax Court decisions that show different approaches to some fairly basis math. We need a higher court to address this issue. Until that time, we can be worldly in the ways of tax law as long as we can do our counting by using just the fingers of one hand. After that things start to get complicated.
-- Shelley J. Spring
The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.
