In recent years there has been a trend for businesses to hire contractors to fulfill long-term positions rather than offering permanent employment. Individual contractors who provide their services through a corporation need to understand the risk that the Canada Revenue Agency (CRA) may assess their corporation to be a personal service business (PSB), especially if they are providing services to just one client.


What is a PSB?

In its simplest terms, a PSB exists where an individual provides services to another entity on behalf of the corporation that would typically be performed by an officer or employee of that other entity. This type of situation tends to arise when there is a long-term contract and the corporation only has the one "client" to whom it provides services. The individual providing the services through the corporation also tends to be the only employee and, in most cases, is one of the shareholders, or possibly the sole shareholder, of the corporation.

In determining whether a corporation is a PSB, the CRA would look at:

  • Whether the employee performing the services or any person related to them owns more than 10% of the issued shares of the corporation; and
  • Whether the employee would, if it were not for the corporation, reasonably be considered an employee of the entity receiving the services.

If the CRA determines that the corporation is a PSB and we assume that the corporation is a resident of Ontario, the corporation would be subject to tax at a rate of 44.5%. Contrast this against the small business tax rate of 12.5% and it’s clear that the PSB rules are very punitive.

In addition, the PSB rules also limit the expenses that can be deducted. The only allowable expenses that would be deductible are:

  • Salaries and wages paid to the employee (paid salaries and wages; accrued payments are not deductible);
  • Benefits and allowances provided to the employee;
  • Any expenses associated with selling property of the corporation or negotiating services; and
  • Legal costs paid in connection with collecting amounts owed for services rendered.

What can you do to avoid having the income of your corporation assessed as income from a PSB?

The simplest solution is to avoid providing long-term services to a single client. The more clients you have, the better the chance the PSB rules would not be applicable. Another way is to ensure that there is always a contract in place that details the services you will be providing and the specifics of the business relationship. You also want to ensure the agreement addresses the following items that the CRA uses to determine whether an employment relationship exists to support the position that your corporation is an independent contractor as opposed to a PSB.

  • The degree of control you as the contractor will have over how the work will be performed and the work to be done. Whether you can accept or refuse work from the payer.
  • The degree of independence you as the contractor will have concerning your daily activities.
  • The control over the tools required to fulfill the contract. Will you, as the contractor, invest and purchase the tools needed to perform the work required?
  • Chance of profit or loss: Are there any fixed costs associated with the contract and any expenses incurred that will not be reimbursed?

Finally, ensure that you invoice your client regularly, whether it be monthly or by the project.


Do you have a long-term contract that you feel may be at risk of being assessed as a personal services business by the CRA? Please contact your McCay Duff advisor for assistance, guidance and more information on this subject.

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   CRA, Tax Planning
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