Finance Committee on Dec. 3rd, 2009

[The Chair, Conservative, James Rajotte]

Okay, question—

[Marlene Jennings, Liberal, Notre-Dame-de-Grâce—Lachine, QC]

—allow you to do the opposite.

[The Chair, Conservative, James Rajotte]

Let's hear an answer.

[Susan Betts]

The distinction is that just because somebody has a corporation doesn't automatically make them a personal services business. There are the four factors that have to be evaluated in every case—

[Marlene Jennings, Liberal, Notre-Dame-de-Grâce—Lachine, QC]

You're missing the point.

[The Chair, Conservative, James Rajotte]

Do you want to finish, Ms. Betts? You have a few seconds left in this round.

[Susan Betts]

Go ahead.

[Lucie Bergevin]

I would like to add that we work under the Income Tax Act. Subsection 125(7) helps us make a determination about a personal services business, or PSB.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Paillé, you have the floor.

[Daniel Paillé, Bloc, Hochelaga, QC]

I want to stick with this subject. This is how I understand it. Let us suppose that you determine that an individual is an incorporated employee, to use your terminology. I am talking about a regular person who could have been, for example, employed by company ABC. You come along and tell this individual that he or she is no longer considered to be an entrepreneur who has provided services to company ABC, but, rather, an incorporated employee and that, therefore, his or her expenses, which include—as you well explained—financial charges, bank charges, etc., are no longer deductible. You have the power to reclassify entrepreneurs as incorporated employees; but, company ABC who contracted with the entrepreneur, and who therefore claimed the entrepreneur's fee as a deductible expense, will be unaffected.

[Lucie Bergevin]

The Canada Revenue Agency has a team that monitors large employers. The members of this team ensure that these large employers pay the taxes that they owe. If I understand you correctly, you are asking me if we make a referral when we carry out an audit.

[Daniel Paillé, Bloc, Hochelaga, QC]

Exactly.

[Lucie Bergevin]

I would refer you back to section 241 of the act that prevents us—

[Daniel Paillé, Bloc, Hochelaga, QC]

I understand the rule, and as a former public servant, I understand your duty of confidentiality. However, to once again use an expression that you used, is there not a manifest unfairness in the tax regime given the privileged position you have with regard to the various provincial taxation departments? You receive information from Revenu Québec, and you apply it at the federal level—the flood gates are open. However, you are telling us that the act does not allow you to take any measures against the company that signed the contract as it is a third-party signatory. That is hugely unfair.

[Wayne Adams, Director General, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency]

You have a good observation, but I think it's casting it in a bit of an unfair light. Parliament, through the Income Tax Act in 1981, set out the law that said where the specified shareholder, the principal shareholder, is essentially carrying out the duties of employment, tax outcomes fail. It did not say that you then ignore the corporation or recharacterize the individual. It just says if it could be reasonably considered that the person is carrying out employment duties, which tracks back to the 1800s and your master-servant concept and has kind of transcended through a couple hundred years. We're not talking about a principal-agent relationship here; we're talking about a master-servant relationship. Parliament decided it would effect an outcome that said that corporation will not be eligible for the small business deduction and will not be eligible for other expenses. It did not say that you ignore the corporation, treat the person as an employee, and go back to the payer company and assess EI.

I think the outcome you're looking for is, would we go back to the company and assess EI? That is an option that the EI legislation could add, that where it's determined that payments are made to personal services corporations, there will be an additional assessment of EI. I think that recommendation is available to you. But it isn't an inconsistent action by the revenue authorities.

[Daniel Paillé, Bloc, Hochelaga, QC]

Yes, but it remains that paying tax is not a choice.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

I would like to follow on from what my colleague was saying. In your presentation, Ms. Bergevin, you said that one of the main issues the amendment to the act was trying to address was the case of an individual employed by a corporate employer who resigns, establishes his own corporation, and contracts his former employer. Were there any other reasons behind the amendment?

What is more, we know that a lot of public servants do exactly the same thing. They retire and then win contracts with the federal government. Has any particular attention been paid to the status of people who retire and then provide service to the federal government on a contract basis, while at the same time getting their pension? Is that something that has been audited?

[Lucie Bergevin]

With regard to your first question, it is indeed just one example. It is a question of fairness. When the act was amended in 1981, the objective was to be fair both to employees and individuals the Revenue Agency considers to be employees. It was just an example to illustrate the principle.

With regard to your second question on people who resign from the public service and then contract with the federal government, they are taxpayers like you and I and are therefore subject to our risk evaluation system. We have processes for evaluating risk and determining which audits to carry out. These people are not treated any differently than any other taxpayers.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Fine, thank you.

[The Chair, Conservative, James Rajotte]

Merci, Monsieur Laforest.

Mr. Menzies, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

And thank you to our witnesses.

I hope you were here earlier to hear some of the compelling presentations we had. It is very troubling, and it's troubling in a couple of different ways. Coming from Alberta, I've never heard this raised.

My colleague asked whether it is just a Quebec issue, so that's one question I have. Why is it different for a backhoe operator in the oil patch in Saskatchewan or Alberta?

[Wayne Adams]

I don't believe it is solely a Quebec issue, and I don't believe it would apply differently in any province.

This issue that has come up has involved incorporated specialists, whether they are engineers...and other situations perhaps. A backhoe operator having the cost of his own tools, his own backhoe, would be a lot different from an employee backhoe operator. It wouldn't be typical for an employer of employees who operate heavy equipment in the oil patch or Fort McMurray to expect them to bring their own tools or equipment to work. That could be one difference. With high-tech, maybe it isn't as apparent that you would have a correlation there.

But I can assure you that it's not a Quebec issue. We have had litigation and reviews of individuals who might be considered personal services businesses in all provinces.

[Ted Menzies, Conservative, Macleod, AB]

To expand on that, we have the same high-tech contractors, if you will, in other provinces. I'm still struggling with why this hasn't been raised. I think we have an agreement from our previous witnesses that it's not just Quebec, but is it something that is administered differently in Quebec?

[Wayne Adams]

No, it isn't. There's a focus in Quebec, under the Civil Code, about subordination, so maybe that question of control becomes a more focused analysis. But with respect to the question of whether it would apply equally if people are conducting themselves in the same way in the high-tech industry in other provinces, we'd likely arrive at exactly the same answer.

[The Chair, Conservative, James Rajotte]

I am sorry, we do have bells. We can find out exactly what the vote is on.