What is a Personal Services Business?
During a review of incorporated business activities, the Canada Revenue Agency (CRA) may determine that your corporation is a personal services business (PSB). This can happen in a situation where your corporation is providing services to another company (the client corporation) and you personally could be considered to be an employee of the client corporation. This result is most likely to occur when all or substantially all (90%) of your corporation’s revenue comes from only one client corporation.
The income tax effects of such a determination by CRA have changed significantly in recent years and are now very severe. The only deductions from business income generally allowed to a PSB are salaries paid to the owner who would otherwise be an employee. In addition, a corporation that has been designated as a PSB is no longer eligible for the small business deduction - which in Alberta means that instead of paying corporate income taxes at a rate of 14%, the corporation’s tax rate increases dramatically to 40%!
For more information on this topic or to discuss your own tax situation in more detail, please contact the office of Daryl Pallesen CPA, CGA at your convenience.