The Services Carve-Out from TOSI

The new tax on split income (TOSI) rules do not include amounts that are income or gains from excluded shares—defined as shares in a business of which the income-receiving individual owns at least 10 percent of the votes and value (subsection 120.4(1) of proposed legislation released on March 22, 2018). However, this key relieving provision will not apply if the business is a professional corporation or if 90 percent or more of the business income of the corporation is "from the provision of services." What does the phrase "provision of services" mean?

"Provision of services" is used in only four places in the Act. In particular, paragraph 20(1)(bb) discusses a deduction for non-commission fees paid to investment counsel whose principal business "includes the provision of services in respect of the administration or management of shares or securities." Similarly, subsection 125(3.2) provides that a CCPC can assign all or any portion of its business limit for a taxation year to another CCPC if the second CCPC has an amount of specified corporation income from the provision of services to the first CCPC. In other words, if one CCPC provides services to another, the service-receiving CCPC can assign a portion of its business limit to the service-providing CCPC. Further references to "provision of services" appear in more specialized provisions in subparagraph 212(1)(d)(xi) and subsection 250(6.02). None of these four previous usages of the phrase "provision of services," or the few court decisions referencing them, offer any insight into the meaning of the phrase. Thus, the term "provision of services" creates significant ambiguity in the new TOSI rules, raising questions about what types of income will be free from TOSI.

Indeed, the term can be interpreted in several ways:
  • If services are something to be distinguished from goods, one might propose that TOSI-free income is income from the provision of a concrete thing that gets made and sold. On this view, income from the provision of services is anything not involved with the provision of tangible things. For example, a computer repair person, a hairstylist, a landscaper, a moving company, and a cleaning company all provide a service.

  • If the provision of services requires face-to-face interaction, then an orthodontist, a hairstylist, and a child-care provider all earn income from the provision of services, whereas a software support provider and a financial analyst do not.

  • If the provision of services, in contrast with the provision of goods, always involves a duration of time, then any business that charges an hourly rate earns income from the provision of services. On this view, a hairstylist is not involved in the provision of services, but a moving company is.

  • ETA subsection 123(1) defines the term "services" broadly: it says that a service is anything other than (1) property, (2) money, and (3) supplies made to an employer by an employee. If this meaning of "services" is what the new TOSI rules contemplate, then all of the businesses mentioned above will earn income from the provision of services.

This review of what "provision of services" might mean shows that large sections of the economy could be vulnerable to the new TOSI. Without further guidance from the Department of Finance, the term may end up being the focus of disagreements between taxpayers and the CRA, with taxpayers seeking to limit the scope of the term.

Kathryn Walker
Thorsteinssons LLP, Toronto
[email protected]

Canadian Tax Focus
Volume 8, Number 2, May 2018
©2018, Canadian Tax Foundation


  • Jeff Sulemanovski 5/11/2018 1:55:06 PM

    At the end of the first paragraph, should the reference to 10% be changed to 90%? i.e. ... "or if more than 90 percent of the business income of the corporation is from the provision of services."

  • Jeff Sulemanovski 5/11/2018 1:57:37 PM +1

    At the end of the first paragraph, should the reference to 10% be changed to 90%? i.e. ... "or if more than 90 percent of the business income of the corporation is from the provision of services."

  • Alan Macnaughton 5/14/2018 12:12:28 PM

    (From the editor of Canadian Tax Focus) Thanks, Jeff. The article has been changed.

  • Jeremy Bordeleau 11/21/2018 3:05:54 PM

    This comment is a bit late but we're discussing this issue at my firm currently and I had a thought that seemed to get some traction in the group. I like the third interpretation listed (where charging for services based on time vs a fixed fee is the distinction between a provision of services vs. not under the TOSI rules). However, I felt that a business like a moving company should still fall under the definition of excluded shares. Therefore, I thought of an additional distinction of a knowledge worker vs a skilled worker (or physical worker). Using that distinction, if you are moving furniture from one location to another, this would be a physical service and the shares of this business would be excluded. However, if you provide investment advice (with a fixed commission rate), this would be knowledge work and the shares of your business would not be excluded. This comment became long-winded but I'm interested in hearing anyone's thoughts.