Personal Service Business

Personal service business (“PSB”) has become a hot topic since the Canada Revenue Agency (“CRA”) started an PSB educational outreach project recently. Between June and December 2022, the CRA will be contacting Canadian businesses from industries that potentially hire PSBs to determine whether these companies are fulfilling their tax obligations. In the webinar for PSB[1], the CRA has identified five industries (Trucking, IT Consultants, Accountants, Construction, and Catering) that they believe it’s common practice for hiring PSB.

Determination of PSB Status

Your business may be considered PSB if the following conditions are met:

1. An incorporated employee[2] performing services, or any person related to the incorporated employees, is a specified shareholder[3] of the corporation;
2. If the corporation did not exist, the incorporated employee, would be considered an employee[4] of the entity receiving the services;
3. The corporation does not employ more than five full-time employees throughout the tax year;
4. the amounts received by the corporation for services were not received from an associated corporation.

Tax implications for a PSB

• Higher corporate tax rate on PSB income
  • In Ontario, the 2022 federal and provincial combined corporate tax rate on PSB income is 44.5% compared to the rate of 12.2% for income eligible for the small business rate.
  • If the after-tax PSB income was paid as an eligible dividend to a taxpayer in the highest tax bracket, the 2022 combined corporate and personal tax would be 66.33%. This is almost 13% higher than the Ontario top tax rate of 53.53% on ordinary income.

• Limitation on PSB expenses
  • The deductions that the corporation could claim when computing PSB income are limited to the following:
    • Salary, wages or other remuneration paid to an incorporated employee.
    • Employment benefits or allowance provided to an incorporate employee.
    • Expenses associated with the selling of property or the negotiating contracts.
    • Legal expenses incurred to collect amounts owing.

As the above shows, the tax consequences of unexpectedly earning PSB income in a corporation can be costly. If you have been contacted by the CRA to participate in the PSB education program, please contact us. We can help you to determine if your business is a PSB, manage your PSB risk and recommend remedy actions you can take.

[1] https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/businesses-video-gallery/personal-services-business.html

[2] An incorporated employee is defined as a person who performs services on behalf of the corporation.

[3] A specified shareholder is a person who owns directly or indirectly, at least 10 percent of the issued shares of any class of a particular corporation or of any other corporation that is related to the particular corporation.

[4] Whether the service provider would be considered an employee is determined using the same factors used to decide whether an individual is employed or self-employed: control, tools, ability to subcontract, financial risk etc.