In general, a personal services business (PSB) exists where the individual performing the work would be considered to be an employee of the payer if it were not for the existence of the individual’s corporation. These workers are often referred to as incorporated employees.
Where it is determined that the income is earned from a PSB, the corporate tax rate increases significantly (potentially as high as 39% over the small business rate, depending on the province). In addition, significantly fewer expenditures are deductible against the income.
Since 2022, CRA has been conducting an educational pilot project in respect of PSBs. They have recently published findings from the project and highlighted future planned phases.
Phase I – Identifying companies that hire PSBs
Phase I of the project was conducted from June to December 2022. The results were as follows:
approximately 10% of participating corporations were likely to be carrying on PSBs;
approximately 64% of potential PSBs were incorrectly claiming the small business deduction (an average of $16,711 of additional federal corporate tax would be payable if this were corrected);
nearly 74% of potential PSBs work in the following three industries:
transportation and warehousing (35%), with 95% of these working in freight trucking;
professional, scientific and technical services (26%); and
Phase II – Identifying potential PSBs
CRA indicated that Phase II is planned for October 2023 to June 2024, and will examine approximately 2,100 randomly selected corporations identified as potential PSBs. The examination will include a voluntary interview and focus on the 2022 tax year. CRA indicated that they hope to gain greater insight into how and why PSBs operate the way they do.
Phase III – Assisted compliance for PSBs
CRA indicated that the timing of Phase III has not yet been determined. They expect to address the 2022 and subsequent tax years with continued education, review of PSBs and assisted compliance of non-compliant PSBs.
It has been noted that identification of PSBs has become a focal point for CRA. If there is a risk of your corporation carrying on a PSB, inquire as to the corporation’s exposure and potential mitigation strategies.
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The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.