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Is Your Incorporated Business a Personal Service Business? Know the Risks in 2026
Many contractors and consultants incorporate because it seems like the logical next step. A client recommends it, a colleague suggests it, or someone mentions the potential tax advantages.
For most people, the decision makes sense.
What many incorporated professionals do not realize, however, is that simply having a corporation does not automatically mean the Canada Revenue Agency (CRA) views you as an independent business.
In some situations, CRA may classify your corporation as a Personal Service Business (PSB), which can have significant tax implications.
If you provide services through a corporation, especially to a small number of clients, understanding the rules is important.
What Is a Personal Service Business?
A Personal Service Business is a corporation that earns income from services provided by an incorporated individual who would reasonably be considered an employee if the corporation did not exist.
In simple terms, CRA looks beyond the corporation itself and examines the actual working relationship.
The question they are trying to answer is straightforward:
If the corporation disappeared tomorrow, would this person likely be considered an employee?
If the answer is yes, the corporation may be classified as a Personal Service Business.
Why Does It Matter?
The consequences can be significant.
Corporations classified as Personal Service Businesses generally lose access to several tax advantages available to other Canadian-controlled private corporations.
This may include:
- Losing access to the Small Business Deduction
- Paying a higher rate of corporate tax
- Restrictions on certain deductible expenses
- Potential reassessments from CRA
For incorporated professionals, the result can be an unexpected tax bill and a difficult conversation with their accountant.
Situations That Can Raise Questions
No single factor automatically creates a Personal Service Business.
Instead, CRA looks at the overall relationship between the worker and the client.
Some common factors they may consider include:
- Most of your income comes from one client
- You perform duties similar to employees of that organization
- The client controls when, where, and how you work
- You primarily use the client’s equipment, systems, or workspace
- You assume little financial risk
- You are integrated into the client’s day-to-day operations
Having one of these factors does not automatically mean your corporation is a PSB. However, several factors together may increase the risk.
Industries Commonly Affected
Personal Service Business concerns frequently arise in industries where incorporated contracting is common, including:
- Information technology
- Engineering
- Management consulting
- Project management
- Financial services
- Professional consulting
This is one reason incorporated professionals should review their situation periodically, especially if their client relationships have changed over time.
A Quick Self-Assessment
While every situation is different, asking yourself a few questions can help identify potential concerns:
- Do you earn most of your income from a single client?
- Would your role look similar to that of an employee if your corporation did not exist?
- Does the client control your schedule or how your work is completed?
- Do you primarily use the client’s equipment or resources?
- Would it be difficult to demonstrate that you operate as an independent business?
If you found yourself answering “yes” to several of these questions, it may be worth having your situation reviewed before CRA asks questions of its own.
How Can You Reduce Your Risk?
Many incorporated contractors can strengthen their position by operating more like an independent business.
That may include:
- Working with multiple clients
- Maintaining control over how work is performed
- Using your own equipment and tools
- Clearly documenting contractual relationships
- Demonstrating business risk and opportunity for profit
Every situation is unique, which is why professional advice can be valuable.
When Should You Seek Advice?
The best time to review your PSB risk is before it becomes a problem.
If you are incorporated and provide services to a small number of clients, a proactive review can help identify potential concerns and provide opportunities to strengthen your position.
At Mowbrey Gil, we help contractors, consultants, and incorporated professionals understand their obligations, assess potential risk, and make informed decisions with confidence.
Moving Forward
Incorporation can provide meaningful advantages, but it is important to ensure your business structure aligns with CRA requirements.
Understanding the Personal Service Business rules today can help reduce risk, avoid surprises, and support stronger tax planning in the future.
If you have questions about your corporation’s status or would like professional guidance, please reach out to the team today.
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