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 as a PSB. Generally speaking, a PSB exists where the individual performing the work would be considered an employee of the hiring company if it were not for the existence of the corporation. PSBs’ tax obligations are different than other corporations. For example, they are not eligible for certain deductions, such as the small business deduction (SBD).

The PSB Pilot

The CRA launched its PSB pilot in 2022. The pilot was 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 was to help businesses better understand and comply with their tax obligations.

The PSB pilot was undertaken using a multi-phased approach to allow for greater cooperation with industry representatives and the business community. This approach allowed PSBs (and the companies that hire them) sufficient time to understand their tax obligations before considering compliance measures. Participation in the pilot was voluntary and provided businesses with a unique opportunity to engage directly with the CRA.

Benefits of participating in the PSB pilot

While participation in phase 1 and phase 2 of this pilot was voluntary for those contacted by the CRA, businesses that agreed to participate benefit from the following:

Opportunity for proactive resolution:
Participants had the opportunity to address any potential areas of non-compliance in their tax filings before the CRA identified them. This allowed them to avoid the stress and challenges of a formal reassessment.
Expert guidance on PSB compliance:
If a participant’s corporation met the definition of a PSB, the CRA provided tailored advice to help them understand their requirements. This knowledge could then be applied to ensure compliance in future filings.
Minimized risk for future audits:
Addressing potential issues during the pilot demonstrated participants’ commitment to compliance and helped prevent complications down the road.
Corrective actions without immediate reassessment:
If corrections to their returns were necessary, participants had the opportunity to make them during this pilot without the CRA initiating a reassessment, providing a more collaborative and less formal resolution process.
Enhanced awareness and understanding:
This pilot provided a unique opportunity to receive insights and expertise directly from CRA specialists. It empowered participants with a clearer understanding of their compliance obligations and equipped them to handle them more effectively in the future.

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.
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 June 2024

Methodology

During phase 2, CRA officials contacted approximately 2,100 randomly selected accounts from a list of potential PSBs from a variety of industries. The businesses were invited to participate in a voluntary review to determine if they are operating as a PSB. If the business appeared to be operating as a PSB, officers would then ask a series of questions to gain insight into the behaviour of PSBs and the relationships between them and their hiring client.

Through this review, the CRA was able to identify the corporations operating as a PSB, educate them about their filing obligations, , and offer them the opportunity to change their T2 Corporate Income Tax Returns or correct future filings without risk of penalty or immediate reassessment.

This phase also enabled the CRA to gain further insight into how and why PSBs operate the way they do.

Key findings

Phase 2 provided a limited view of PSB activity. Based on the participation level, the CRA cannot apply preliminary findings to all industries. However, some trends can be highlighted:

913 of the corporations contacted agreed to participate in a voluntary review, of which nearly 74% (680) of the participants identified as working in 2 sectors/industries:
- 203 participants from transportation and warehousing
- 477 participants from professional, scientific, and technical services
Nearly one-third (291 - 32%) of the participants were determined to be operating as a PSB.
- A little over half (183 - 63%) of these confirmed PSBs incorporated because they felt they were required to do so in order to find work. Close to one-third (83 - 29%) indicated they were told to incorporate by their hiring company, of which 42% were incorrectly informed that they were eligible for the SBD or general tax reduction, and 60% were told they could claim various operating expenses on their T2 - Corporate Income Tax Return.
- More than three quarters (245 - 84%) of these confirmed PSBs had claimed the SBD, which they were not eligible for, and did not include the additional 5% tax on PSB income.
- Nearly 83% (241) of these confirmed PSBs operate in transportation and warehousing (124 of 203 participants - 61%) and professional, scientific and technical services (117 of 477 participants - 25%).

Takeaways

The key findings from phase 1 and phase 2 of the PSB pilot suggest that:

there is a general misunderstanding about how to properly file a T2 Corporate Income Tax Return as a PSB.
PSBs, hiring companies, accountants, and tax preparers would benefit from additional education regarding the filing requirements and allowable benefits when filing as a PSB.

For more information on tax obligations for PSBs, please visit:

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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Date modified:: 2025-03-18

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