Personal Services Business Changes

Many taxpayers providing services through a corporation have recently been subject to review by the CRA to determine whether the corporation’s activity constitutes a personal services business (PSB) – in effect, whether in the absence of the PSB corporation the individual would be considered an employee of the recipient of the services.  A finding that the corporation is carrying on a PSB results in the denial of many types of expenses, as well as the denial of eligibility of the corporation’s income for the small business limit deduction.  As a result, the corporation is taxed at the highest corporate tax rate.

However, even where a PSB has been found to exist, some taxpayers have been able to achieve tax advantages.  To the extent an individual did not require the after-tax funds earned by the corporation, a tax deferral of approximately 18% could still be achieved as compared to a situation where the individual earned the income personally.  In addition, the use of a PSB corporation provided a structure for splitting income with family members in some cases.

Recently proposed changes to the taxation of PSB income have effectively eliminated these advantages.  As a result of these proposed changes, PSB income will be subject to a tax rate that is approximately 13% higher than prior to the proposed changes.

As a result, anyone carrying on activity through a corporation that could be subject to a PSB challenge by CRA should consider the strength of their facts.  Likewise, anyone considering a new venture that could be considered a PSB activity may want to reconsider.  A finding that a PSB exists will not simply result in the denial of the small business deduction limit, but will now ultimately result in double-taxation.

- Zoran Vranjkovic, CA
Tax Manager
Welch LLP