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Small Business
Glossary
  -> Personal Services Business

Personal Services Business (PSB)

Income Tax Act s. 125(7), s. 123.4(1)

A personal services business (PSB) carried on by a corporation in a taxation year means a business of providing services where

  1. an individual who performs services on behalf of the corporation (an "incorporated employee"), or
  2. an person related to the incorporated employee

is a specified shareholder of the corporation, provides services to another entity, and the relationship between the provider of the service and the entity receiving the service could reasonably be regarded as an employee/employer relationship.  However, if the corporation employs more than 5 full-time employees throughout the year it will not be considered to be carrying on a personal services business.

If the individual performing the services would be considered a contractor and not an employee, then the corporation would not be considered a PSB.  See our article on Employee vs Self-Employed Contractor.

In 2015 Tax Court Case C.J. McCarty Inc. v. The Queen, a corporation which was providing project management services to a client was found to be providing those services as an independent contractor, NOT as a personal services business.

In 2004 Tax Court Case 758997 Alberta Ltd. v. The Queen, a corporation which was providing services to a client through a placement agency was found to be a PSB.

Personal Services Business - Deductions are Limited

S. 18(1)(p) of the Income Tax Act restricts the deduction of expenses of a personal services business of a corporation to the following allowable deductions:

  1. the salary, wages or other remuneration paid in the year to an incorporated employee of the corporation
  2. the cost of any benefit or allowance provided to an incorporated employee
  3. any amount expended in connection with the selling of property or the negotiating of contracts by the corporation, as long as the amount would have been deductible if it had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount, and
  4. legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered

The above amounts are only deductible by a personal services business if they would be deductible by a business other than a personal services business.

Personal Services Business Corporate Tax Rate

A personal services business is not eligible for the small business deduction, and thus pays tax at full corporate tax rates.  For taxation years that begin after October 31, 2011, a PSB is also not eligible for the general rate reduction, resulting in a federal corporate tax rate of 28%.  The total tax rate in 2014 in Ontario would be 39.5%, and in BC 39%.  The 2016 Federal Budget proposes to increase the federal corporate tax rate for personal services business from 28% to 33%, effective for the 2016 and later taxation years.  Where the corporate taxation year straddles 2015 and 2016, the rate increase will be prorated according to the number of days that are after 2015.

The owner of a personal service business would have to do some analysis to determine whether any profits should be left in the corporation, or should all be paid out as salaries/bonuses.  Our Canadian Tax Calculators can do the calculation of the personal taxes under different scenarios.

Canada Revenue Agency Resources

     - IT-73R6 The Small Business Deduction

     - IT-168R3 Athletes and Players Employed by Football, Hockey and Similar Clubs

 

Revised: March 22, 2016

 

 

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