If you are being asked to fill out the questionnaire sent by the CRA, your corporation is not too far from being classified as a PSB – Personal Service Business or you can call “ incorporated employee.” This issue is not rare since the CRA has changed the rules in 2012. Furthermore, 2016 Federal budget has raised the tax rate for PSBs to 33%, which put many consultants as well as subcontractors in a unfavorable tax position.

So, why is this issue still popular?

Well, everyone needs to make a living.  Many consultants/IT contractors are being forced to incorporate the company in order to get the project from government bodies and other large corporations. This is the reality but the ugly part is that later on, those in corporations are considered PSBs by the CRA. Whose fault is this? Large organisations can save big money on benefits including CPP and EI as in corporations are not employees.Then, what’s left to those incorporated consultants — being classified as PSBs and tax consequence.

First, what’s bad about being classified as PSBs?

1. Deductions are limited in determining your taxable income. Here are a few deductions allowed by the Income Tax Act:

2. No small business deduction.

One of the benefits to incorporate a business is to enjoy the low corporate tax rate, which is attributed by the generous small business deduction of 17%, which results in 15% combined tax rate in 2017. However, once the corporation is classified as a PSB, the corporation is not eligible for the small business deduction.

3. Corporate tax rate applied to PSBs is way too high

Due to #2, PSBs will pays tax at full corporate tax rates. After 2011, PSBs can not enjoy the general rate reduction, either. 2016 Federal budget finally raised the federal corporate tax rate for PSBs to 33%. Combined with Ontario provincial corporate tax rate 11.5%, the total tax rate for PSBs in Ontario is 44.5% as compared the personal highest tax bracket of 46.16%. No bad!?

4. GST/HST, your business is still on the hook.

Even if you are reclassified as a PSB, does it mean “an employee” cannot collect the GST/HST from his/her “employer” and money collected should be considered income?No, income tax and excise tax are two different families.

Can I do a self-assessment on whether my corporation is a PSB?

Sure. Why not! Simply put, if your corporation has only one or two clients, generally those are large government agencies/bodies, and does not employ more than 5 full-time employees, you are likely falling in the category of Personal Service Business. Furthermore, there are a few criteria in assessing whether the individuals are contractors or employees. If you barely meet those requirement to be considered as contractor, then the risk being classified as a PSB is increasing.

Is there any way that I can mitigate the risk of being classified as a PSB?

Quite frankly, the fundamental solution is to build up your client base by marketing your skills and experience. Other ways like reviewing the contract to ensure the terms are written in the language between client and service provider; not acting like employees in client’s, etc. You have be mindful of the difference between self-employed contractors and employees. On the other end, IT contractors/consultants have to assess the impact if being classified as a PSB. You won’t get panic if knowing what is coming towards you. Furthermore,  do analysis to determine whether any profits should be left in the corporation or should be paid out as salaries right away in the corporation taxation year.

If you have any concerns about being classified as a PSB, contact us or drop us a line. We surely can help!