Personal Services Business

Transcript

Hello and welcome to the Personal Services Business webinar. 

My name is Jackie and I am your host for today.

For today, please use the question box to post your questions related to Personal Services Businesses.

We’ll answer as many as we can during the webinar. 

For any other tax related questions, we invite you to call the business enquiries line at 1-800-959-5525.

Let’s get started.

Today, we’ll talk about:

• Employment status and business-to-business relationships
• The definition of personal services business
• The different tax deductions, rates and eligible business expenses
• Filing obligations and deadlines
• Filing requirements
• The Personal Services Business Pilot
• Correcting tax returns
• Reporting non-compliance

There are generally three options that a payer and service provider can have: 

• Employer/employee
• Hiring business/self-employed worker (contractor),
• either a sole proprietor or corporation
• Hiring business/personal services business 

We’ll have a quick general look at each, leaving aside HR processes.

A worker is considered an employee when:

• The relationship is one of subordination. The payer will often direct, scrutinize, and effectively control many elements of how and when the work is carried out.
• The payer controls the worker with respect to both the results of the work and the method used to do the work. The payer chooses and controls the method and amount of pay. Salary negotiations may still take place in an employer-employee relationship.
• The payer decides what jobs the worker will do.
• The payer chooses to listen to the worker's suggestions but has the final word.
• The worker requires permission to work for other payers while working for this payer.
• Where the schedule is irregular, priority on the worker's time is an indication of control over the worker.
• The worker receives training or direction from the payer on how to do the work.

A worker is considered self-employed when there is no relationship of subordination.

Here are some indicators that a worker is self-employed:

• A self-employed individual usually works independently
• The worker does not have anyone overseeing their activities
• The worker is usually free to work when and for whom they choose and may provide their services to different payers at the same time
• The worker can accept or refuse work from the payer
• The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship.

Self-employed individuals often supply the tools and equipment required for a contract. As a result, the ownership of tools and equipment by a worker is more commonly associated with a business relationship.

A self-employed individual operates a business and is engaged in a business relationship with the payer.

When determining if a corporation is a personal services business or incorporated employee, we generally apply the similar logic used when determining if an individualis an employee or self employed. 

When a PSB exists, there is typically a level of subordination, similar to that of an employee.

It is important to note that workers and payers are free to set their affairs as they wish, but they must make sure that whatever status they have chosen is supported by the actual facts of the working relationship.

In some industries, such as the following, it is a more common practice for payers to require individuals to incorporate in order to provide services:

• Real estate, rental and leasing
• Construction
• Trucking
• Transportation and warehousing
• Professional, scientific, and technical services

The CRA might consider your corporation to be a personal services business if all these conditions are met:

• You are a specified shareholder, holding a minimum of 10% of shares of your corporation, and you, or someone related to you, is the employee performing services for another business
• Were it not for the corporation you created, the above incorporated employees would be considered an employee of the business receiving the services
• Your corporation does not employ more than 5 full-time employees throughout the tax year, and
• Your corporation's income is from services performed by the incorporated employee on behalf of the corporation that is not from an associated corporation

In other words, an individual who chooses to incorporate their business in order to provide services for one other business might be considered to be operating a personal services usiness.

In this case, the company receiving the services would be considered the payer – a person or company who pays the worker or corporation for their services.

And the Personal Service Business receiving payment for those services would be considered the payee.

Let’s look at an example.

John is looking for a job.

An Ontario-based trucking company, ABC Trucking is looking for workers who are providing services through a corporation.

John incorporates his business, 123 Ontario Inc., for which he is the only shareholder and only employee. 123 Ontario Inc. agreed to a contract to provide services to ABC trucking.

John then is an incorporated employee.

John performs the work of an ABC Trucking employee using their trucks.

123 Ontario Inc. bills ABC Trucking for the services it performs, and it receives payment from ABC Trucking for those services.

John is then paid from his corporation (123 Ontario Inc).

In this example, 123 Ontario Inc. meets the conditions outlined in the Income Tax Act to be considered a personal services business:

• John is a specified shareholder of 123 Ontario Inc.
• John performs the work of an ABC Trucking employee using their trucks, and would therefore be considered an employee of ABC Trucking had he not incorporated as 123 Ontario Inc.
• John is the only employee of 123 Ontario Inc.
• 123 Ontario Inc.’s sole income is from services performed by John, for ABC Trucking.

If you are considered to be operating a personal services business by the CRA, your tax obligations are different from other corporations.

The federal corporate tax rate is 38% and, after the federal abatement of 10%, this amount is reduced to 28%.

There are other tax rate reductions such as the general rate reduction and the small business reduction which can further reduce the corporate tax rate, however personal services businesses are not eligible for these additional tax rate reductions.

Since 2016, there is an additional tax of 5% on personal services business income.

In addition to the federal tax, personal services businesses are also subject to provincial or territorial corporate tax rates.

• Personal services business tax rate is full federal and provincial/territorial tax rates.
• Additional 5% tax on personal services business Income
• No general tax reduction
• No small business deduction
• The personal services business must file a T4 slip for each employee (not more than five full time employees throughout the year)
• Limited eligible expenses

For example, in Ontario, the current provincial corporate tax rate is 11.5%.

Therefore, a personal services business in Ontario will be subject to a total corporate tax rate of 39.5%. This includes both the 28% federal corporate tax rate and the 11.5% provincial corporate tax rate.

Since 2016 there is an additional tax of 5% on personal services business taxable income.

This brings the corporate tax on PSB income to 44.5%

Furthermore, personal services businesses can only deduct specific business expenses from income, such as:

• the salary and wages the corporation pays to its incorporated employee
• that provides services.
• any benefit or allowance that the corporation provides to its employee above.
• certain expenses of the corporation associated with selling property or negotiating contracts.
• legal expenses the corporation incurs for collecting amounts owing to it.

Amounts paid by one business to another business, including a personal services business, for services provided is considered as income, not salary or wages and, therefore, the amounts are not subject to statutory payroll deductions.

This means that the payer does not withhold income tax, CPP and EI on the amounts they pay to a personal services business.

However, at year-end, the personal services business will be required to pay to the CRA corporate income tax on all income earned by the corporate tax filing and payment deadlines.

Like other corporations, a personal services business is required to file a T2 Corporation Income Tax Return and must file its return no later than six months after the end of each tax year.

The tax year of a corporation is its fiscal period.

For example:

• If your tax year ends March 31, your filing due date is September 30.
• If your tax year ends August 31, your filing due date is February 28.
• If your tax year ends September 23, your filing due date is March 23.

When operating a personal services business, if you pay salary and wages from your corporation, you will have to withhold income tax, CPP contributions and, in some cases, EI premiums. These amounts must be remitted to the CRA along with the employer’s share by the due date.

At the end of the year, the corporation will have to report the income paid to employees and the deductions on a T4 slip, Statement of Remuneration Paid. 

Employers must provide employees with a T4 slip by the end of February each year. For more information, see Guide RC4120, Employers’ Guide – Filing the T4 Slip and Summary, on the Canada.ca website.

The corporation has to register for a payroll program account before the first remittance due date.

The first remittance due date is the 15th day of the month following the month in which the corporation began withholding deductions from the employee's pay, unless the CRA tells the corporation to remit using a different frequency.

You must register a GST/HST account if you make over $30,000 annually, and you must file GST/HST returns.

In June 2022, the CRA launched the Personal Services Business Pilot. The pilot seeks to provide the Agency with greater insight into how personal services businesses operate and provide a better understanding of the degree of non-compliance within this business structure.

A primary goal of the pilot is to inform those who hire or operate personal services businesses of the tax obligations associated with that business model.

Phase 1 of the pilot focused on educational outreach to the businesses who hire personal services businesses with 2100 of them invited to participate.

Those who took part in the project voluntarily provided their books and records for review.

Nearly 74% of the potential personal services businesses were identified to be working in 3 sectors/ or industries:

• 35% in transportation and warehousing with 95% of those within general freight trucking or specialized freight trucking.
• 26% in professional, scientific and technical services
• And 13% in construction

Subsequent phases of the Personal Services Business Pilot, including Phase 2, beginning in the fall of 2023, will provide valuable insight and data on the personal services business model.

In each phase, there is the opportunity to identify potential gaps that result in tax returns filed incorrectly and present the potential for increased tax fairness within industries. 

If you believe you might be operating, a personal services business and would like to correct the tax returns you previously filed, you can contact the CRA’s Voluntary Disclosure Program to determine if you meet the eligibility requirements and submit an application.

If you would like to change your T2 return, you can request a reassessment. For more information on how to request a reassessment, call the Business Enquiries line at 1-800-959-5525 or visit the CRA website to search for requesting a reassessment of your T2 return.

Today, we covered these issues relating to personal services business:

• Employment status and business-to-business relationships
• The definition of personal services business
• The different tax deductions, rates and eligible business expenses
• Filing obligations and deadlines
• Filing requirements
• The Personal Services Business Pilot
• Correcting tax returns

Tax administration is as complex as life itself. If the content today doesn’t quite fit your situation, please:

• Visit our website.
• Visit Canada.ca/cra-liaison-officer to get free tax help from a liaison officer
• Call CRA's business enquiries line at 1-800-959-5525
• You can also go to canada.ca/cra-videos where you’ll find all our business webinars. We’ve come to the end of our webinar. Please click on the survey icon in the tool bar at the top of the screen to fill out the evaluation form for this webinar.

Thanks for joining me today. I hope it’s been helpful. Stay tuned for more webinars in the coming months!

Good bye.