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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.