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Small Business
     Glossary  -> Personal Services Business

Personal Services Business (PSB) - Incorporated Employee

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

Sometimes contractors are hired with the requirement that they incorporate and provide their services through their corporation.  If, absent the corporation, they would be an employee, then their corporation is considered to be a personal services business.  There are tax implications to being a personal services business - higher corporate income tax rates and limited expense deductions.

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. a person related to the incorporated employee

is

bullet a specified shareholder of the corporation,
bulletprovides services to another entity, and
bulletthe 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 or, for taxation years that begin after October 31, 2011, the general rate reduction. The 2016 Federal Budget increased the federal corporate tax rate for personal services business from 28% to 33%, effective for the 2016 and later taxation years.

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.

Personal Services Business - CRA Education Project

In July 2022, CRA sent out a communication regarding a PSB project they have commenced.  See more information on this in the Video Tax News article Personal Services Business - CRA Education Project, which includes a link to the communication sent by CRA.

TaxTips.ca Resources

Small Business Deduction

Corporate Income Tax Rates

Canada Revenue Agency Resources

Tax implications for a personal services business

Personal Services Business Webinar

T2 Corporation Income Tax Guide (T4012) - Personal Services Business

T2 Corporation Income Tax Guide (T4012)

IT-73R6 The Small Business Deduction (Archived)

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

Revised: July 21, 2022

 

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