It is common for independent consultants such as engineers, architects, etc., to provide services through a corporation to a large multinational. The consultant runs the risk of being treated as an employee and denied business expenses by the tax authorities. In addition, the income of the corporation is no longer eligible for the lower rate enjoyed by small businesses. The effect is to tax the income of the independent consultant at the highest rate (currently 39% in Alberta) without any offsetting business deductions. This is commonly referred to as a personal services business (PSB)

Geocorp would have an additional tax liability of $26,400 ($39,000-12,600) if CCRA successfully assessed the corporation as a PSB.

However, the rules that apply to a PSB do not apply to a Business Trust. The effect is that the independent consultant will be allowed his business expenses as long as the individual providing the services does not own 10%, or more, of the outstanding shares of that multinational.

Another benefit of a business trust providing services is that it allows income splitting with minors without being subject to the "kiddie tax" rules. New legislation has been introduced which severely hampers the ability to split income between family members under the age of eighteen years. The new section of the Income Tax Act is commonly referred to as the "kiddie tax". The effect is to tax investment income in the hands of minors at the highest marginal rate.

SUMMARY

This concept of the business trust has been tested in the Federal Court of Appeal. The decision in the Federal case was that if such trusts are set up with the proper documentation they will not attract the attribution rules under section 56(2) of the Income Tax Act.

The court ruling provides an excellent planning opportunity for independent consultants who wish to split income with family members under the age of 18 years.

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All documents and information provided by JWL Management Inc. are strictly confidential. A retainer of $5,350 (CDN, includes GST) is payable in trust to JWL Management Inc. before commencement of work.