Small business owners who operate their businesses through a corporation are
entitled to certain tax advantages, including a preferential corporate tax rate
on the first $250,000 of income as well as access to the $500,000 lifetime
capital gains exemption, which can be used to exempt the capital gain on the
sale of the business from tax.
While it may be tempting for investors to consider transferring their
investments to a corporation to take advantage of these two tax breaks, the
Income Tax Act only grants these advantages to corporations who earn "active
income," which excludes investment income as well as rental income. Corporations
that earn investment income but that are sufficiently active such that they
employ "more than five full-time employees" can still qualify for these tax
The meaning of the ostensibly straightforward phrase "more than five
full-time employees" was the subject of a recent Tax Court case involving Diane
Baker and several other shareholders of Town Properties Ltd., a company that
owned and operated a commercial office building in Victoria.
On its tax returns, the company claimed the preferential tax rate on its
income and the shareholders also claimed the capital gains exemption on the
transfer of their shares to holding companies.
Town Properties employed six custodians who were responsible for the cleaning
and maintenance of the property who worked from Monday to Friday, four hours per
Ms. Baker maintained that these employees should be considered to be
full-time since the definition of "full-time employment" should take into
account the normal working hours of a particular class of employees. She argued
that since custodians generally only work four hours or so per day, they should
be considered "full time."
Unfortunately, the judge disagreed, pointing to various definitions of "full
time," including one that defines a full-time employee as "one who is employed
for the entirety of a normal working day." He dismissed the case, saying "the
custodians working for Town Properties work only from 6 p.m. to 10 p.m. They
would actually be able to work a full 9-to-5 day in addition to their custodial
duties. Clearly, their employment with Town Properties does not take up the
'regular working hours of the day' and does not amount to full-time employment."
Interestingly, this is not the first time that the meaning of the phrase
"more than five full-time employees" has come before the courts. In a 1994 tax
case, the Court was asked to determine whether a business that had five
full-time employees and one permanent part-time employee met the definition.
The taxpayer in that case felt that it was the intention of the Tax Act to
express the notion of employment in a "fluid-measure sense," like "more water"
instead of meaning individual employees, maintaining that one could have "more
than five full-time employees" by supplementing the five full-time employees
with a few part-timers.
The judge disagreed and concluded that an employer must have six or more
full-time employees to qualify, saying "one cannot 'top up' five full-time
employees with a few part-time employees to fill the ... quota."