The details of two different businesses are listed below. Business 1 Purti Collaron works in the...

 

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The details of two different businesses are listed below. Business 1 Purti Collaron works in the sewing department of Dream Gowns Inc. (DGI). Wanting to take advantage of the tax deferral provided by the small business deduction, Purti created Collaron Ltd., billing DGI for services provided. DGI agreed to this arrangement for the following reasons: • Purti still provides the same service at the same hourly rate. • DGI has full control over the work schedule. Purti works full days Monday to Friday. • The quality of the work is the same because DGI's machines are still used. • Purti agreed to work exclusively for DGI. Business 2 Burt Smith is a CPA working as the chief financial officer for a privately owned automobile dealership. For the past few years, Burt has performed contract services on the side, operating as a sole proprietorship. These services focus primarily on developing educational materials and grading exams for accounting students, but Burt also performs compilation and tax preparation services for a few local businesses. This year, attracted by the benefits of tax deferral and liability protection, Burt incorporated a company to invoice for services that were previously performed by the sole proprietorship. Burt sets his own hours, uses his own laptop for the services provided and always has a written contract in place for each service provided. If a job is NOT completed according to the deliverables in the contract, Burt will NOT get paid. Required: a) Explain what a "personal services business" (PSB) is and discuss whether each of the two businesses described above would be classified as a PSB. Explain the factors that the Canada Revenue Agency considers when determining if a business is a PSB and whether each business described above meets that definition. (5 marks) b) Identify and discuss four undesirable income tax effects a business would be subject to if it was deemed to be a PSB. (2 marks) The details of two different businesses are listed below. Business 1 Purti Collaron works in the sewing department of Dream Gowns Inc. (DGI). Wanting to take advantage of the tax deferral provided by the small business deduction, Purti created Collaron Ltd., billing DGI for services provided. DGI agreed to this arrangement for the following reasons: • Purti still provides the same service at the same hourly rate. • DGI has full control over the work schedule. Purti works full days Monday to Friday. • The quality of the work is the same because DGI's machines are still used. • Purti agreed to work exclusively for DGI. Business 2 Burt Smith is a CPA working as the chief financial officer for a privately owned automobile dealership. For the past few years, Burt has performed contract services on the side, operating as a sole proprietorship. These services focus primarily on developing educational materials and grading exams for accounting students, but Burt also performs compilation and tax preparation services for a few local businesses. This year, attracted by the benefits of tax deferral and liability protection, Burt incorporated a company to invoice for services that were previously performed by the sole proprietorship. Burt sets his own hours, uses his own laptop for the services provided and always has a written contract in place for each service provided. If a job is NOT completed according to the deliverables in the contract, Burt will NOT get paid. Required: a) Explain what a "personal services business" (PSB) is and discuss whether each of the two businesses described above would be classified as a PSB. Explain the factors that the Canada Revenue Agency considers when determining if a business is a PSB and whether each business described above meets that definition. (5 marks) b) Identify and discuss four undesirable income tax effects a business would be subject to if it was deemed to be a PSB. (2 marks)

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a A personal services business PSB is a type of business which has the following factors as identifi... View the full answer