Personal services businesses under scrutiny by CRA
A new CRA campaign is focusing on personal service businesses and will be ramping up their investigation of compliance with tax regulations in this area.
What is a personal service business?
A PSB is a corporation where the shareholder of the corporation provides their services to one specific business, similar to an employee. This is also called an incorporated employee. The individual would be considered an employee if it was not for the corporation. Another condition is that the corporation does not have more than 5 full-time employees.

Some common service business examples involved in this scenario is trucking, IT consulting, accounting, construction, catering, to name a few. Whether a corporation is a PSB or not, it definitely impacts their tax situation. If your corporation is considered to be a personal services business by the CRA, your tax obligations are different from other corporations’.
The federal corporate tax rate for PSBs is 28% after a federal abatement of 10%. It is noteworthy that PSBs are not eligible for the small business deduction, nor the general tax rate reduction, and are subject to an additional tax of 5%, which amounts to a total federal tax of 33%. In addition to this, provincial corporate tax rates apply. If the PSB treats the service income as eligible for small business tax rates but is found by the CRA to be a PSB, a significant tax liability could arise.
The deductible expenses allowed by a PSB are the salary the corporation pays to its incorporated employee, including benefits, and legal expenses. Keep in kind that the amount paid by a business for services provided is considered income, not salary, and corporate income tax must be paid on these amounts.
More and more individuals incorporate their self-employed business to avoid personal liability but the tax implications must be clarified to avoid common pitfalls and red flags. The new CRA campaign is contacting Canadian businesses until the end of the year 2022, to ask for documentation about their payer/payee relationships. Participation on this campaign is voluntary.
To summarize, if a corporation is deemed to be a PSB, the two main tax consequences are: a higher corporate tax rate and limitations on the corporate business expenses. As an example: in Ontario, the total 2022 federal and provincial tax rate on PSB income is 44.5 per cent, while the eligible small business tax rate is 12.2 per cent. To add fuel to the fire, if the corporate funds are received as a dividend or capital gain by the individual, a further personal tax amount arises, adding up in this case to 66.3%.
This is a serious consideration before someone decides to incorporate their business as an individual. To read more about the implications of a PSB on your tax responsibilities, check this link:
As always, sound tax planning will go a long way to clear up confusion and minimize your tax burden.
Written by: Christa Lazar