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PricingService areasAll services →What is a Personal Services Business (PSB)?
By Wajahat Ajmal
In today’s dynamic economy, personal service businesses (PSBs) are gaining prominence. These businesses are typically defined as companies that offer services performed by individuals, From trucking businesses to consultants, PSBs are diverse. However, they are faced by serious negative tax implications if they are designated one by the CRA.
In this article, we will delve into the concept of a personal service business, examine the challenges posed by Canada’s tax regulations for PSBs, and explore strategies to mitigate the negative tax impacts.
Table of Contents
So, What is a Personal Service Business?
A Personal Service Business has the following characteristics:
- An individual provides services through an incorporated entity;
- That individual also holds more than 10% of the shares in the same incorporated entity;
- If it was not for the incorporation, the individual would have an employee-employer relationship;
- The corporation does not employee 5 full-time employees apart from the shareholder; and
- the services were not provided to an associated corporation.
The other test is of that being an Incorporated Employee. The following are normal tests performed as determined by the courts, it is not an extensive list as each case is dealth on the fact of case-by-case basis:
- The level of control the payer has over the service provider’s tasks (more control suggests an employment relationship).
- If the payer provides tools for the service provider to use (this indicates an employment relationship).
- Whether the service provider is required to complete the work personally or can hire subcontractors (inability to subcontract points to an employment relationship).
- Whether the service provider has made a capital investment in their business.
- Whether the service provider has the potential for profit and faces a risk of loss.
- Offering similar services to other clients suggests self-employment.
What happens if you are Designated as a PSB then?
No Small Business Deductions
Once you are designated as a PSB, you are not allowed to claim Small Business Deductions (SBDs). This increases your disposable income on which income tax is charged.
The only expenses you are allowed to claim are:
- Salaries and Wages paid to the incorporated employees;
- Employment benefits for that individual;
- Expenses of the corporation associated with selling property or negotiating contracts; and
- Legal expenses incurred by the corporation in collecting amounts owing.
Higher Tax Rates
The tax rate goes up if you are determined a PSB. In Ontario, for example, the Corporation Tax Rate increases to 44.5% from 12.20%, enjoyed by Small Businesses and coupled with disallowing of SBDs, the impact is significant.
To put it into perspective, let’s see an example:
A $100,000 income will be subject to 12.20% tax, equalling to $12,200 in taxes, whereas for a PSB, the income tax would be $44,500, a significant increase of $32,300!
Penalties and Interest on Non-Payment of EI and CPP
If you are a PSB, this means you are also most likely an Incorporated Employee. This means that the payments you received for your services is considered as wage on which you should have remitted CPP and EI. Not remitting those payroll taxes can result in significant penalties and interest charges.
How Do I Minimize the Taxes as a PSB?
Good question!
Although, the difinitive way to avoid being classified as a PSB is to employee 5 full-time employees apart from yourself, pay all of your earnings to yourself as a salary, given you cannot claim most expenses, and remit those payroll taxes to the CRA instead of paying yourself dividends.
Dividends are not tax deductible and being a PSB, you will already be paying 44.5% taxes on your corporation income. Now, paying yourself dividends, means that you will be paying additional tax on top of 44.5% in personal tax return.
I Am Not Sure if I Am a PSB?
Our recommendation is to always reach out to professional if you believe yourself to be a PSB.
The early, the better as it will give you enough time to prepare. You can register a payroll account with CRA and start paying yourself wages.
If that is something that you believe is not possible, we may be able to help.
