Independent Contractor (S85 required? Personal Services Business risk)

Tax Topics
1

I started working with an independent contractor - I have thoughts re S85 rollover and Personal Services Business risk.

Facts:

  • Heating and cooling technician
  • Contract is with an intermediary company that contracts him to do work for a major utility company (intermediary company pays him)
  • Sole proprietorship since 2017 - incorporated in 2024
  • Tangible assets rolled from Sole Prop to Incorp have no gain (depreciable assets)
  • Goodwill - little to none potentially (these are my initial thoughts)
  • When he first started his business half his revenue came from the contract from the intermediary company and the other half was from side jobs. As time went on side jobs decreased and then increased again during the winter. At the moment 90% of his revenue is from the contract with the intermediary company and 10% side jobs (one-offs and recurring) so he has multiple clients

Told taxpayer he could work with a lawyer to:

  1. Complete S85 rollover
  2. Review agreement to ensure that the language has not inadvertently made him to sound like an employee

However, he prefers to have me look over his situation and provide a consultation.

Preliminary research:

RE S85:
https://www.avalonaccounting.ca/blog/section-85-rollover

In some cases it could be argued that the entire brand reputation is tied to you individually, as the operator, and therefore the brand would be worthless without you.

In this case the value attributed to the goodwill could be considered insignificant, resulting in no gain and no tax on transfer to the corporation.

There is always a risk that CRA would disagree with this determination, in which case they could assess your goodwill at a higher value and charge the applicable tax. Using a Section 85 Rollover would provide a form of assurance that no taxes would be incurred on the original transfer of the asset.

I believe this applies to the taxpayer’s situation - therefore none to nominal goodwill. S85 not required.

RE Personal Services Business Risk:
Told taxpayer I’m not a lawyer and will not review the agreement, however, I will provide tips on how to mitigate personal services business risk.

There is a well-known accounting firm that specializes in this area (more with IT professionals) and has plenty of articles and YouTube videos. I’ve read all articles and watched all videos.

Here is one article and one video:
Top 10 Strategies to reduce PSC risk
https://cpa4it.ca/top-10-strategies-to-reduce-psc-risk/

Avoiding Personal Service Corporation Risk
[https://www.youtube.com/watch?v=RxceQph1T8o]

Conclusion:
I plan on providing the taxpayer with several tips I’ve gathered from accounting firms and law firms that discuss strategies to mitigate personal services business risk.

Ultimately, I had the taxpayer sign an engagement letter on this topic including the following paragraph:

  • We would like to remind you that whether or not to complete a section 85 rollover, and whether or not to designate your corporation as a personal services business are your decisions, and that we will have no responsibility for any consequences of whatever decisions you make in each regard.

Thoughts?

2

Doing a rollover from personal to corporation, there would be no goodwill created. I just write up a sales agreement selling the assets to the corporation at book value and complete the Section 85 accordingly. That is the purpose of a section 85 rollover in my understanding.

For a HVAC contractor doing work for multiple clients, there is no potential for the corporation to be considered a Personal Services Corporation. There would be nothing stopping him from hiring a worker to help him with his business.

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3

When I did the In-Depth Tax course many years ago, we were advised to include a nominal $1 of goodwill value just in case (for business transfers). You can build a price-adjustment clause into the share attributes taken back as consideration in case CRA determines the value of the transferred property is different from the share consideration taken back.

Even if you refer this to a lawyer, lawyers will look to the accountant to provide advice about whether to do a S85 transfer and how the mechanics of the transfer will work. They have an aversion to giving tax advice unless they are a tax lawyer (and that sounds beyond your client’s budget). The lawyer will also want the accountant to review draft documents.

For your engagement letter clause, I would come right out and tell the client that nothing you’re doing should be construed as providing legal advice (and then follow that advice). The client is advised to seek proper legal advice. I’d also stay away from creating agreements. Just because a client wants to save money and have you do what is otherwise legal work doesn’t make it a good idea. If something goes wrong, you won’t have a leg to stand on.

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4

Great

  1. Any sales tax considerations (GST/HST applicable)?
  2. You mentioned complete S85 but if no value in the goodwill and no gain on depreciable assets sold to corporation wouldn’t that mean no need for S85?

I plan on not providing an opinion.

My thoughts:

  • Taxpayer’s decision whether or not to have a S85 completed and accept the risk if no S85 is completed.

Do you see it differently?

5

The section 85 is what transfers the assets from personal to corporate without any change in values, and no tax consequences including HST.

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6

Do you see it differently?

Maybe you’re not giving an “opinion” but the client is looking for advice from you regarding the best way to incorporate. This can come pretty close to an opinion. Definitely, if you get the client’s lawyer involved, the lawyer will be looking for you to make the call on whether or not to do a S85 transfer. From what I see in your original question, I would doubt that a S85 transfer would be needed but that’s based on summary information.

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