What does Personal Services Business and incorporation have to do with each other?
First, let's understand what a PSB is. CRA considers a corporation to be a PSB where an individual registers themselves as a corporation to perform services for one hiring business exclusively. We see this setup in industries such as Construction, IT Consultants, Trucking, and Catering.
In other words, this corporation would be considered an employee of the payer if it were not for the existence of the corporation. Unfortunately, CRA does not penalize the hiring business which tends to be large organizations instead it penalizes the incorporated employee or PSB.
Should CRA determine that your Corporation is a PSB these are some of the punitive measures that your corporation will be assessed with:
PSBs are not eligible for the small business deduction, or the general tax rate reduction. Effective for the 2016 tax year and beyond, PSBs are subject to an additional tax of 5%, bringing their total federal corporate tax rate to 33%. In addition to the federal tax, PSBs are also subject to provincial/territorial corporate tax rates.
For example, the current provincial corporate tax rate in Ontario is 11.5 percent. Therefore, a PSB in Ontario will be subject to a total corporate tax rate of 44.5 percent. This includes both the 33 percent federal corporate tax rate and the 11.5 percent provincial corporate tax rate. 2. PSBs can only deduct specific business expenses from income, such as:
the salary and wages the corporation pays to its incorporated employee;
any benefit or allowance the corporation provides to its incorporated employee;
legal expenses the corporation incurs for collecting amounts owing to it.
3. Previously filed tax returns will be adjusted to the PBS tax rate above.
To be assessed by CRA as a PBS can be detrimental to your business and may be very difficult to front financially. Ensure that the legal of structure of incorporation serves its purpose correctly to avoid any problems and set your business for success. Should you like more information CRA held a webinar where it goes into detail about this topic. To watch it click here.
If you'd like more information or help with when or how to incorporate contact us.