This is a follow up to my last blog, where I started talking about one pitfall that associate independent contractor dentists want to avoid: being deemed at law by the Canada Revenue Agency to be operating through a Personal Services Business Corporation. Basically, if this happens, then the associate’s dentistry professional corporation won’t be able to have the first $500,000 of its active business income taxed at the low rate of 15.5%. Furthermore, the corporation would be limited in making certain deductions that would otherwise be permitted in computing its income. Ouch!
Recall that one of the requirements for a dentistry professional corporation to be deemed to be a personal services business corporation is the idea that the associate would, if it weren’t for the dentistry professional corporation, be AN EMPLOYEE of the director. So if the Canada Revenue Agency is making this determination, what factors are they looking at?
Well, the Canada Revenue Agency’s Interpretation Bulletin 73R6 talks about this. It says the following:
¶ 19…. The determination of whether an incorporated employee would otherwise be regarded as self-employed or as an officer or employee of the entity to which the services were provided is a question of fact. The following list of factors, although not exhaustive, are indications of employee status:
(a) the entity to which the services are provided has the right to control the amount, the nature and the direction of the work to be done and the manner of doing it;
(b) the payment for work is by the hour, week or month;
(c) payment by the entity of the worker’s travelling and other expenses incidental to the payer’s business;
(d) a requirement that a worker must work specified hours;
(e) the worker provides services for only one payer; and
(f) the entity to which the services are provided furnishes the tools, materials and facilities to the worker.
Did you notice that these factors are very similar to the test of independent contractor vs. employee which I’ve blogged about elsewhere? Check out these blogs. Specific factors which the courts have held relevant include:
- whether the associate solicits his or her own clients (apart from the dentist);
- whether the associate has their own business cards and marketing materials or simply uses that of the dentist’s;
- whether the associate’s name is on the dentist’s phone directory;
- whether the associate’s corporation is paid regularly without submitting an invoice;
- whether or not the dentistry professional corporation can risk losing money; and
- whether ongoing services are performed over an indefinite period of time (as opposed to a set term).
So what’s important here is not only what the agreement says between the dentist and the associate’s dentistry professional corporation, but the reality of the relationship between all three parties: the dentist, the associate, and the associate’s dentistry professional corporation. If the written agreement makes the associate out to be more of an employee than an independent contractor, then the final aspect of the personal services business corporation requirement may have been met (thereby denying the dentistry professional corporation the ability to use the small business tax rate and make certain deductions in computing its income for tax purposes).
Anyways, that’s enough on that topic for now…