Canada Revenue Agency (CRA) recently began contacting companies that might be hiring Personal Services Businesses. What does that mean, and is your Company impacted?
What is a Personal Services Business (PSB)?
A Personal Services Business is sometimes called an “incorporated employee.” Officially, the designation as an incorporated employee kicks in when all of the following apply:
- An individual is providing services to an unrelated third party and is billing for those services through a corporation.
- The individual worker/service provider owns at least 10% of the corporation’s outstanding shares of any class of capital stock that is billing for the services or any other corporation related to it.
- The corporation providing the services does not employ more than five full-time employees throughout the year.
- If the corporation did not exist, the worker/service provider would be considered an employee of the third party receiving the services.
Point 4 above is usually the most difficult to determine – so much so that it has been argued in court on several occasions. For an in-depth discussion on this point, please see our previous article link to the consultant vs employee article.
Your McCay Duff LLP advisor can help determine if your business is a Personal Services Business.
What happens if my business hires a Personal Services Business?
You could be contacted by Canada Revenue Agency, asking for details regarding the working relationship between your company and the service provider. They might ask for contracts, invoices, or other documentation. According to the CRA website, this process aims to ensure that hiring companies fulfill their tax obligations. Presumably, this means checking whether T4A and/or T5018 slips have been filed. At this stage, participation in the project is voluntary, but we are skeptical that it will remain so indefinitely.
How to prepare for CRA’s educational campaign as a hiring business
If you hire contractors, your McCay Duff LLP business and tax consultant can help you determine if T4A and/or T5018 slips must be filed.
You may also want to re-read the article (same link again) and call us if you’re concerned that some of your service providers might be reclassified as employees.
What happens if my corporation is a Personal Services Business?
If your company is designated as a Personal Services Business, your corporation could pay a lot more in taxes. Personal Services Businesses have fewer tax deductions and pay higher corporate tax rates.
Fewer tax deductions
Tax deductions for personal services businesses are limited to:
- Salaries and wages
- Employee benefits or allowances
- Legal expenses incurred to collect money owing to the corporation
- Expenses that the worker would be allowed to deduct on their personal tax return if they were an employee with a standard employment contract
Other expenses incurred by the PSB would be denied even if they were necessary to earn income.
Higher corporate tax rates
Personal Services Businesses are not eligible for the Small Business Deduction or the general rate reduction. In addition, PSBs are subject to an additional 5% tax over and above what other corporations would pay.
In Ontario, a Canadian-Controlled Private Corporation whose income is eligible for the Small Business Deduction would pay 12.2% in combined Federal & Ontario corporate tax. However, in contrast, a Personal Services Business would pay 44.5%. A huge difference!
How to prepare for CRA’s educational campaign as a service provider
If your corporation has the potential to be assessed as a personal services business, there are two key steps to prepare.
Document the working relationship between your corporation and your client. Re-read the article (link same as above) and be sure that your work arrangement favours self-employment as much as possible.
Pay yourself a salary instead of a dividend
When paying remuneration from your corporation, choose salary over dividends. Salary paid to you from your corporation is deductible to your corporation whether the corporation is assessed as a personal services business or not. This means less profit left over in the corporation and minimizes the potential impact of a higher corporate tax rate being levied.
McCay Duff LLP in Ottawa for trusted tax and business advisory strategies
Hopefully, your business won’t be selected for contact by Canada Revenue Agency. However, if you are, your McCay Duff LLP advisor can guide you through your best course of action. Let the team of business advisors at McCay Duff LLP help you develop a strategy to take your business to the next level. We develop creative and efficient accounting, business advisory and tax solutions that help our clients achieve their financial goals. To learn more about how we can help you and your business, contact us online or by telephone at 613-236-2367.