Personal Services Business
Many individuals choose to incorporate their businesses because of the various tax deferrals and savings. However, taxpayers must be aware that the Canada Revenue Agency (CRA) will not allow certain types of businesses to benefit from these tax advantages. Specifically, the CRA has an issue with what is known as a Personal Services Business (PSB).
PSBs are defined in subsections 248(1) and 125(7) of the Income Tax Act. Essentially, a PSB is defined as someone who provides services through a corporation, and if that corporation did not exist, the individual would be considered an employee of the business he or she was providing services to. In other words, you would be considered an “incorporated employee”.
The PSB rules prevent taxpayers from accessing the small business deduction, and in addition, some other deductible expenses are not allowed. These expenses are found in subsection 18(1)(p) of the Income Tax Act. This is also the reason that CRA will reassess taxpayers claiming that their corporations are actually PSBs. It means more taxes will be owing as the taxpayers tax rate increases without the small business deduction, and various expenses will be denied.
To avoid the PSB rules, you must be considered an independent contractor and not an incorporated employee.
In various Tax Court decisions, the PSB rules apply if the following conditions are met:
- Income of the business is from services rendered by an individual, referred to as an “incorporated employee”;
- The “incorporated employee” rendering the services, or a related person, is a specified shareholder (holds 10% of issued shares);
- The “incorporated employee” could very easily be an officer or employee of the corporation to which he or she is providing services;
- The PSB does not employ more than five full time employees; and
- The services are not being provided by an associated corporation.
Whether or not a corporation is found to be a Personal Services Business is usually decided based on the third condition found above. Essentially, are you an incorporated employee? This is a question of fact and each case is looked at independent of others.
If you are being audited for a Personal Services Business, or if you think you might be, give us a call today to see how we can help!
C.J. McCarty Inc. v. The Queen, 2015 TCC 201 – Test for Personal Services Business focusing on Integration of Services Provided
Gomez Consulting v. The Queen, 2013 TCC 135 – Where Corporation found to be Personal Services Business
Dynamic Industries Ltd. v. The Queen, 2005 FCA 211 – Anti-Avoidance Nature of the Personal Services Business
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.