Good morning. Thank you for having invited us.
As Mr. Sabourin explained, we took a quick look at the provisions of the act. As we understand it, a person who operates a business is entitled to deduct expenses he or she has incurred to earn income, as stipulated in section 18 of the Income Tax Act. Naturally, by definition, this excludes employee status, given that an employee does not incur expenses to earn an income.
According to what I have learned, some very clever people realized during the 1980s that the creation or interposing of a company between the client or principal and the employee could allow the employee to claim deductions. Naturally, that includes the small business deduction, as set out in subsection 125(7) of the act. That is what triggered the amendment and the anti-avoidance provisions that you have heard of and that prevent this type of very clever tactics.
Naturally, creating a company severs the working relationship. We thus consider that with these anti-avoidance provisions, the act is pursuing a legitimate objective, as has already been the case. However, CRA's interpretation of this provision does not, in our opinion, take into account the real situation of self-employed workers, especially those who work in very specialized sectors such as information technology.
I am raising this issue because in section 125(7) of the act, the criterion used to define a personal services business is extremely vague. This section states: where it can "reasonably be regarded" that the shareholder of the company providing the services to a client could be an employee of the client. Now that could apply both to Jean-Pierre and Fernand. In my opinion, determining what is reasonable is the crux of the matter.
The problem is also that presumptions are used to infer things. These presumptions may be linked to specific circumstances. A whole array of criteria may be used, such as work organization, schedules or many other things. Naturally, when you put all this together, CRA bureaucrats are quick to state that they are dealing with an employee.
So let's come back to the crux of the matter. By the very nature of their work, IT experts deal with different realities. As Mr. Garceau said, an IT worker who must develop computer hardware or software for a large business cannot move the computer system into his home office. This type of constraint means that at first glance, his status would seem to correspond to that of a PSB, under subsection 125(7). However, when you look more closely at the situation, you can see that given the nature of his work, a close analysis must be done to determine whether it is or not a PSB. Does this require that the CRA issue a new interpretation bulletin or other measures to better inform these people as to where they stand? The criteria used to determine what a PSB is have not really evolved in technological sectors. In my opinion, that is a major problem.
The other major problem arises from the fact that entrepreneurs, businesses and even governments demand that these people be incorporated into corporations because they want the working relationship to disappear.
They don't want to pay employment insurance premiums and to have to take on these burdens, these payroll taxes. They are complicit to some extent given that they have helped give birth to a presumption by Revenue Canada that these workers are PSBs.
Could the Standing Committee on Finance not propose a form requiring the work providers to inform Revenue Canada that they are requiring the subcontractor to incorporate, and that they can then intervene when there's any issue of opposition?
Furthermore, these people live in uncertainty for 12 months, and the following year, they might have to pay assessments if they indicated in their income tax return that they were entitled to the small business deduction and to deduct their expenses. This creates uncertainty for them, which is also a problem.
I don't know whether, in such cases, there could be recourse to an advance ruling or a simple mechanism like that. For example, it could be established that in the next 30 days, if the department is unable to make a determination on the status of that worker, the burden of proof would be reversed and we would then presume that the worker is not a PSB. Furthermore, if there are any assessments, the department will have the responsibility of showing that it is one.
In my opinion, this kind of measure could help these people. There may be many others. We are giving you some suggestions, but ultimately it is up to you, the wise members of the House of Commons, to find solutions.
Whatever the case might be, there is a gap between the evolution of the legislation and the evolution of technologies. Mario and I have prepared documents for you. I hope that they will help you continue your study.
Thank you.