Personal services business pilot
Helping personal services businesses and the companies that hire them better understand their tax obligations
The Canada Revenue Agency (CRA) has been working to help Canadian corporations operating as a personal services business (PSB) and the companies that hire them better understand their tax obligations.
If you have incorporated your business to provide services, you might be considered to be operating a PSB. Generally speaking, a PSB exists where the individual performing the work would be considered to be an employee of the hiring company if it were not for the existence of the corporation. This structure is sometimes referred to as an incorporated employee. PSBs’ tax obligations are different than other corporations. For example, they are not eligible for certain deductions, such as the Small Business Deduction.
The PSB Pilot
The CRA launched its PSB pilot in 2022. The pilot is an opportunity for the CRA to provide outreach and education to corporations potentially hiring PSBs as well as those businesses operating as PSBs. The goal of the pilot is to help businesses better understand and comply with their tax obligations.
The PSB pilot is being undertaken using a multi-phased approach to allow for greater cooperation with industry representatives and the business community. This approach will allow PSBs (and the companies that hire them) sufficient time to understand their tax obligations before we move forward with full compliance measures.
What is a personal services business (PSB)?
Generally speaking, the Income Tax Act (ITA) considers a PSB to exist where the individual would be considered to be an employee of the hiring clients if it were not for the existence of the corporation.
Generally, when a corporation provides services to another corporation, their business relationship will either be one of consultant, an independent contractor or a PSB. Consultants and contractors will have a similar relationship with the hiring business as a self-employed person would on an individual level. A PSB, on the other hand, would be in a subordinate relationship with the hiring client, very similar to what an employee would have with their employer.
A corporation may be operating a PSB if the following conditions are met:
- You, as the incorporated employee performing services, are a specified shareholder of the corporation;
- You would be considered an employee of the entity receiving the services if the corporation did not exist;
- The corporation does not employ more than 5 full-time employees throughout the tax year; and
- The amounts received by your corporation for services were not received from a related secondary corporation.
The small business deduction and the corporate tax rates
A PSB is not eligible for the general tax reduction or the small business deduction, which allows other corporations to reduce their corporate tax rates.
As a result, a PSB is subject to the full federal and provincial corporate tax rates on all taxable income, plus an additional 5% tax.
Correcting tax returns
If you believe you may be operating a PSB and would like to correct the tax return(s) you have previously filed, you can contact the CRA’s Voluntary Disclosure Program to determine if you meet the eligibility requirements and submit an application.
The Personal Services Business Initiative: Overview of Key Findings
Phase 1 - Identifying companies that hire PSBs
Timeline
June to December 2022
Methodology
CRA officials contacted more than 2,100 Canadian corporations and invited them to participate in an educational outreach activity. Employers (clients), who chose to participate submitted their books and records for review. CRA provided them with feedback and information related to their T4A and/or T5018 filing requirements and asked them to make any corrections to their tax returns.
From the data collected as part of Phase 1, initial findings determined two main taxpayer groups:
- Businesses utilizing PSBs (“Payers”); and
- Personal Services Businesses (“Payees”).
Key Findings
Phase 1 provided a limited view of PSB activities. Based on the participation level, we cannot apply preliminary findings to all industries, however, some trends can be highlighted:
- Of the 2,100 corporations that participated, 220 (approximately 10%) were likely to be utilizing PSBs.
- A large portion of potential PSBs (416 - 64%) are incorrectly claiming the small business deduction (SBD), which they are not eligible for as a PSB. Based on data from the pilot, this error would result in a need for the PSB to repay the CRA an average of $16,711 in corporate tax.
- Nearly 74% of the potential PSBs identified work in 3 sectors/industries:
- Transportation and warehousing (35%) with 95% of those within general freight trucking or specialized freight trucking
- Professional, scientific and technical services (26%)
- Construction (13%)
Phase 2 - Identifying potential PSBs
Timeline
October 2023 to fall 2024
Objective & Scope
- Examine a randomly selected inventory of approximately 2100 corporations identified based on previously established criteria as being potential PSBs.
- Voluntary interview of PSBs to gain greater insight on how and why PSBs operate the way they do.
- Participating corporations accounts will be reviewed to determine if they are possibly PSBs.
- Continued education on tax obligations
- Review of the 2022 tax year
Related
For more information on tax obligations for PSBs, please visit:
- Tax implications for a personal services business
- T2 Corporation – Income Tax Guide – Chapter 4
- Income Tax Act, Subsection 125 (7)
- CPP/EI Explained – Truck Drivers
- Personal services business webinar
We welcome your feedback
We are working to make it easier for PSBs to comply with their tax obligations.
Please email us at psb-pilot-pilote-esp@cra-arc.gc.ca if you have any feedback regarding the pilot.
If you have specific enquiries related to your account, please contact the Canada Revenue Agency.
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