April 3, 2023

What is a Personal Service Business (PSB) - What is it?

If you register a corporation to work for a single company, than the CRA may consider it to be a personal service business if:

  • You would be considered an employee of the company that’s paying you (if you didn’t have your corporation)
  • Your corporation doesn’t have more than five full-time employees throughout the year
  • Your corporation’s income is from services performed by you, as the incorporated employee, on behalf of your corporation

The CRA looks at the following elements when deciding whether you’re an employee or contractor:

  • the level of control the payer has over the worker’s activities
  • whether the worker or payer provides the tools and equipment
  • whether the worker can subcontract the work or hire assistants
  • the degree of financial risk the worker takes
  • the degree of responsibility for investment and management the worker holds
  • the worker’s opportunity for profit
  • any other relevant factors, such as written contracts

If you work for multiple companies, then you’re probably OK.  If you provide all your own tools/equipment/truck, have control over how & when you do your job and take on risk then you should also be fine.  Check out this link if you’d like to dive deeper into whether you’d be considered an employee.

The tax consequences can be significant.  If your corporation is considered a PSB, then:

  • Combined corporate taxes (2022) are 41% (33% Fed + 8% AB) for a PSB (45% if in B.C.) This compares to a much lower 11% combined corporate tax rate for most small companies.
  • Tax deductions (write offs) are limited to salaries, benefits/allowances & a few other items that would only be deductible if you were an employee.

Risk mitigation – steps to take if you think your company may be considered a PSB:

  1. Pay yourself a salary instead of dividends. .
  2. Pick up some other jobs and work for different companies.
  3. Include your truck rate & any allowances (i.e. LOA) on your invoices as a separate line item.

It is very common in Northern Alberta and BC for oil & gas companies to require you to set up a corporation and this is a grey area for a lot of companies. If you feel like your company might be considered a PSB, speak to your accountant.

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