Tax Announcements

CRA focused on educating Personal Services Businesses in 2022. Here are a few things you should know!

Earlier in 2022, CRA announced that they will start educating corporations on the Personal Services Business (PSB) rules.  CRA advised that they would be contacting PSBs to ensure they are complying with their tax obligations.  

What is a PSB? 

You may be considered a PSB if you are a corporation that offers services to one company and 

  • you, the incorporated employee, are a specified shareholder of the corporation meaning you own directly or indirectly at any time in the year at least 10% of the corporation; and
  • if it weren’t for your corporation, you would be considered an employee of the company that hired you; and
  • throughout the year, your corporation does not have more than 5 full time employees; and
  • the income your corporation earns is from the services performed by you on your corporation’s behalf.

Tax Implications

Major consequences to operating a PSB is the higher corporate tax rate and limited business expense deductions.

Corporations are taxed at the federal corporate tax rate of 28% after considering 10% federal abatement. For corporations, this rate may be further reduced by the small business deduction and the general rate reduction, which PSBs do not get. Further, PSBs have an additional 5% tax, thus resulting in a total federal corporate tax rate of 33% (plus provincial/territorial corporate tax rate).

In addition, PSBs are limited in terms of what business expenses can be deducted.  Deductible business expenses are salaries and employment benefits paid to incorporated employee, legal expenses PSB may incur to collect amounts owed to it, and expenses related to selling property or negotiating contracts. 


No payroll deductions are allowed on the income earned by PSB since it is considered income and not salary/wages which means that no income tax, CPP and EI will be withheld. However, as a PSB, if you pay salary and wages to employees, you must withhold and remit payroll deductions to CRA, and issue T4 slips to employees. 

PSB must file a T2 Corporation Income Tax Return and pay corporate tax.  Tax Return is due no later than six months after the corporation’s fiscal year end.

How do you determine if you are running a PSB or not?

If you or your payer are not sure whether you are a PSB or an employee, consider the following:

  • Who controls the work being completed, schedule, tools and equipment?
  • Does the payer provide training/instructions regarding the work to be conducted?
  • Does the payer control the worker regarding the method of conducting the work or the results of the work?
  • Is the worker a subordinate of the payer?
  • Does the payer decide on the jobs the worker will do?
  • Does the payer control the pay amount?
  • Does the worker need a permission to work for other payers while conducting work for the payer?
  • Does the worker have a chance of profit and a risk of loss?
  • Did the worker invest in business meaning did they cover costs before billing the payer for services?
  • What was the parties’ intention?

Tips on managing PSB risk

If you are operating a PSB, you can manage the risk by doing the following:

  • Pay out PSB’s earnings as a salary.  This will reduce PSB’s income to be taxed.
  • Document the working relationship by clearly stating that parties are not agreeing to an employer-employee relationship.  Have a written agreement in place.
  • Be reminded that dividends are paid out of after-tax earnings and paying out dividends will not reduce PSB’s taxes.  If you decide to pay out dividends, ensure that you file an eligible dividend designation so as to get a higher dividend tax credit, and thus reduce personal taxes.
  • If unsure what type of a working relationship you have, we can help you obtain a ruling from CRA.  The request for ruling must be submitted before June 30th following the tax year to which the ruling request relates.
  • If you have an employer-employee relationship but you have been operating a personal services business, we can assist you with correcting your tax return(s) through the Voluntary Disclosure Program at CRA.


Tax tips:

Proprietorship versus Corporation. Are you ready to incorporate?

Businesses are often established as proprietorships due to simplicity and lower administrative costs.  A proprietorship structure can also be beneficial in the initial years of operating a business as any losses can be used against other sources of income.  However, as the proprietorship business and its taxable income grow, so will the personal taxes.  Therefore, it is crucial for sole proprietors to determine when will the corporate structure benefits outweigh the costs, so they can make an informed decision on when to incorporate their business.

Main advantages of incorporating include limited personal liability for shareholders, tax deferral, tax reduction and tax planning opportunities.  These benefits must be assessed against disadvantages such as incorporation and administrative costs and the structure complexity.

We can assist you with determining at which point it is beneficial to incorporate your proprietorship.  We will look at the net tax and the after-tax cash under the two scenarios, earning income through a proprietorship, and earning income through a corporation.  On incorporating, you may have assets that need to be transferred to the newly created corporate structure.  We can assist you with deferring taxes on the transfer of eligible assets by utilizing section 85 rollover.  For more information, please send us a contact request or book a consultation through our website.

Don’t wait until the questions consume you. Book a consultation today.