What is a Personal Service Business (PSB)?
A PSB is a type of business designation under Canadian tax law that applies to Canadian corporations that provide services through individuals (specified shareholders) who would likely be considered employees if they were not working through their corporation to perform such services.
Typically, the Canada Revenue Agency (CRA) uses this designation to prevent individuals from using a corporation to avoid paying personal income taxes, which would otherwise be applicable if they were directly employed by their client.
This individual according to CRA is referred to as an Incorporated employee.
It is usually common in professional and technical services (consultants), trucking, and construction services.
Key Attributes of a PSB:
1. Incorporation for Employment: The business is structured as a corporation, but the worker would typically be viewed as an employee rather than an independent contractor.
2. Principal Role of the Corporation: The corporation is essentially hired by an entity to provide the services of the incorporated individual (the “incorporated employee”).
3. Control and Relationship: If the relationship between the service provider (individual) and the client resembles an employee-employer relationship, then it is likely to be classified as a PSB.
Implications under the CRA:
The CRA scrutinizes PSBs because they allow individuals to take advantage of the lower tax rates applied to corporations (Federal – 9%), while possibly avoiding the higher tax rates associated with employment income under the personal income tax.
Taxation Consequences:
1. Limited Expense Deductions: A PSB is constrained in the types of expenses it can deduct. Unlike other businesses, PSBs can generally only deduct the salary or wages paid to the incorporated employee, certain employment-related expenses, and the cost of benefits like CPP or EI. Some standard corporate expenses cannot be deducted from their income if the corporation is deemed a PSB.
2. PSB Tax Rate: PSBs administered under the personal income tax are taxed at a much higher rate than a typical corporation. In recent years, the federal PSB tax rate is approximately 33%, which can be higher when combined with provincial/territorial rates (44.5% in Ontario). This is considerably higher than the small business tax rate, which income eligible for small business deduction typically enjoys a lower rate of 12.2% if it is an Ontario-incorporated entity.
3. Loss of Small Business Deduction: A corporation deemed to be a PSB is ineligible for the Small Business Deduction (SBD) for the first $500,000 of income, which provides favourable tax treatment to small businesses designated as a Canadian Controlled Private Corporation (CCPC).
How to Avoid Being Classified as a PSB:
To avoid being classified as a PSB, the service provider must demonstrate that their relationship with the client is more akin to that of a business-to-business relationship rather than an employer-employee relationship. This might include:
· Providing services to multiple clients
· Owning the tools or equipment necessary for the services
· Assuming financial risk for the work being performed
· Having control over the work schedule and delivery of work done.
To conclude, the PSB designation has significant tax implications for the individual, including higher taxes and limited expense deductions, and the CRA uses this designation to ensure taxpayers are not improperly taking advantage of creating a corporate tax structure.
The basic conditions considered to be a personal service business can be seen in the link provided below Determine if the worker’s corporation is carrying on a PSB – Canada.ca.
To fully understand the progress and help educate the public on PSB including tax obligations, visit the CRA website: What is a PSB – Canada.ca
If you are not sure whether PSB rules apply to your situation, contact us to discuss and determine the best tax strategy. Please visit Philad Consulting Inc. or email us at info@philadconsulting.ca.
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