Your Company Has More Than Three Full-Time Employees... Or Does It?

In our May tax newsletter, we mentioned that in Quebec’s spring budget, the government announced that the tax burden on some companiesi with fewer than three full-time employees would increase starting in 2017. In fact, these companies will be denied the small business deduction (SBD), which will increase their tax rate from 19% to 21.8%. Moreover, as we have demonstrated, this announcement will have significant financial repercussions for shareholders.

However, the concept at the heart of this announcement is not clearly defined. Indeed, at what point do we consider that a company employs more than three full-time employees?

The Québec Budget

The text of the budget specifies that only certain corporations will continue to benefit from the tax cut, that is to say, those who offer employment 1. throughout the year, 2. within their company, 3. to more than three full-time employees. Each of the above requires special analysis because eligibility for the SBD requires that all three of these criteria are met.

The Tax Act

This “new” concept is not new. It dates back to 1980, when the companies that generated property revenue (rent, interest, etc.) lost their SBD eligibility if they had fewer than five full-time employees. The tax authorities and the courts have thus had several opportunities to rule on this concept in past years.

Court Decisions

Number of Hours Worked

In the Bakerii case for which a decision was rendered in 2005, the court had to determine whether the custodians who maintained the buildings of an individual were full-time employees of a company. In fact, these janitors worked four hours per day. The individual claimed that the four hours of daily work were a standard in the industry and that, therefore, they could be considered full-time employees. The court denied this argument. Specifically, in its decision, the court noted that:

While Town Properties employees worked five days a week, and to that extent were regularly employed, they did not work the normal working hours of each day, week and month. Indeed, their schedule of four hours per day allowed them to pursue more than one job with relative ease.

More Than Three Employees

Fortunately, the term “more than three employees” does not assume there four full-time employees. The fourth could work part-time, and the rule would be respected. Indeed, this issue was discussed in the case of 489599 B.C. Ltdiii and the taxpayer was successful.

The Tax Authorities

The Canada Revenue Agency (“CRA”) has published numerous papers on this issue; we believe Revenu Québec agrees.

Interpretation Bulletins

In an interpretation bulletiniv issued in 2002, the CRA states the following:

The phrase ‘the corporation employs in the business throughout the (taxation) year more than five full-time employees’ is considered to mean that an employer has [four] or more employees working a full business day (or a full shift) on each working day of the year, subject to normal absences due to illness or vacation. Employees working part-time cannot qualify as full-time employees. A part-time employee is generally a person employed for irregular hours of duty or specific intermittent periods, or both, during a day, week, month, or year and whose services are not required for the normal work day, week, month, or year. Vacancies caused by terminations that temporarily reduce the staff to less than six employees will normally not disqualify the corporation provided immediate action is taken to restore the staff to normal strength and there is no undue delay in filling the vacant positions.

In the following situations, employees of a corporation would not be considered to be full-time employees throughout a taxation year:

  1. Mr. A is employed two days a week, does all the bookkeeping, but is available whenever his services are required;
  2. Mr. B's only activity is to attend board of directors meetings, although he is always available whenever his services are required; and
  3. A corporation employs ten employees full-time for six months in a taxation year and for the remaining six months employs no one as it is inactive.”

Thus, we find that firms with seasonal activities will be affected by this because they do not have the required number of employees throughout the year. In addition, the Canada Revenue Agency reiterates in this bulletin that the employee must have an obligation to work full days of every working day. It should be noted that in 2009, the CRA agreed to amend the previous interpretation bulletin as a result of 489599 BC Ltd case so that the fourth employee is allowed to work part timev.

Technical Interpretation

Over the years, the CRA has ruled on more specific situations. Here are a few:

•   Number of hours required to be worked

A taxpayer interviewed the CRA about employees of a medical clinic who work between 30 and 35 hours per week, which is normal in this type of establishmentvi. In this regard, the CRA responded: “In our opinion, a work week of 30 hours or even 35 hours does not constitute a full-time job for exclusion […].”

Therefore, only work weeks of more than 40 hours will be considered in the analysis of the number of full-time employees, even if we consider that most public service employees work full time, even if work fewer weekly hours.

•   Compensation in the form of dividend

In another interpretationvii, the CRA indicated that if an employee decides to remunerate shareholders through a dividend rather than a salary, he can not be part of the number of full-time employees necessary to maintain the eligibility for the SBD.

•   More than one business operated by a company

Earlier, we noted that the calculation of the number of employees had to be done for each business carried on by a company, because one company can operate several businesses. For example, a company might count four full-time employees who provide consulting services in its first business. The profits thus produced could allow the second company to conduct market speculation without using any full-time employees. According to the announced measures, the calculation of the number of employees should be for each company. In the previous example, the calculation could be decisive in providing consulting services, but not for stock market speculation activities. The profits of the two companies would therefore be taxed at different rates, even if the company has more than three full-time employees.

In this regard, the CRA ruled in 2003viii on business combinations within the same company. Taxpayers wanted to transfer rental properties in a partnership to satisfy the rule, because in the end, the number of full-time employees would be achieved once the transaction was completed. The CRA then pointed out that many companies could be involved, each with an insufficient number of employees. Consequently, they could not benefit from the SBD.

Some companies would have to question the number of businesses they operate and the number of employees related to each in order to determine what portion of the profits will benefit from the SBD.


As you can see, some companies that offer good employment conditions to their employees will struggle to satisfy the rule of three full-time employees. We can only hope that the finance minister publishes less restrictive guidelines on this because the scope of this measure, once analyzed, appears to exceed the tax policy underlying it.

  • Corporations in the primary and manufacturing sectors were spared and are not subject to this rule.
  • Baker et al. v. Canada, 2005 DTC 5266 (CFA).
  • 489599 B.C. Ltd v. Canada (2008 DTC 4107).
  • CRA, IT73R6 ARCHIVED - The Small Business Deduction, 2002.
  • CRA, Income Tax – Technical News No. 41, 2009.
  • CRA, 2005-0139641E5 – Full-Time Employees, 2006.
  • CRA, 2009-0329951C6 – Full-Time Employees of a SIB, 2009.
  • CRA, 2002-0179825 – Specified Investment Business, 2003.

The author

Patric Saint-Onge

Patric Saint-Onge

CPA, CA, LL.M.Fisc., TEP, Tax Specialist.
Patric Saint-Onge has been a tax specialist for over 15 years. In 2002, he co-founded the firm Corriveau Saint-Onge Inc. which specializes in Canadian taxation.

Mr. Saint-Onge has worked on major tax cases, applying complex fiscal concepts throughout his career.

He has also been a speaker on numerous occasions for both industry professionals as well as the general public. Among others, the Institute of Chartered Accountants of Quebec has requested his services as a speaker. He has also been invited as an expert in taxation on several television and radio shows, and frequently collaborates with journalists covering the economy to help with articles on various topics.