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Tax Implications of a Personal Service Business: What You Need to Know
If you’re running a business, chances are you’ve already faced your share of tax challenges. But one thing that can sneak up on business owners is the classification of being a Personal Service Business (PSB).
This can be especially tricky if you’re working primarily with one client, or your relationship with that client feels more like an employer-employee situation than a true business-to-business relationship.
Let’s break down what a PSB is, how it impacts your taxes, and why the CRA might be watching more closely than you think.
What is a Personal Service Business?
In simple terms, a Personal Service Business is a corporation that provides services which, in the CRA’s view, look more like an employee-employer relationship than an arm’s-length business engagement.
For example, if you’re incorporated but only work for one client, they control your work hours, provide the tools, and you have little risk of loss—those are all signs that your corporation might be a PSB.
The CRA uses several criteria to assess this, including:
- Level of control the client has over your work
- Ownership of tools and equipment
- Opportunity for profit and risk of loss
- Degree of integration into the client’s business
If the CRA determines your corporation is a PSB, it triggers a different set of tax rules with fewer deductions and a higher tax rate.
Why Does it Matter?
If your business is classified as a PSB, it can lead to significantly higher taxes. PSBs are not eligible for the small business deduction, meaning they’re taxed at the full general corporate tax rate—which is much higher than the rate available to most Canadian-controlled private corporations (CCPCs).
Additionally, PSBs face strict limits on what expenses they can deduct. While typical corporations can write off costs like rent, advertising, or travel, PSBs are generally limited to deducting only salaries paid to the incorporated employee and a few employment-related expenses. As a result, PSB status removes many of the tax advantages that make incorporation appealing in the first place.
How To Avoid Tax Issues
If you’re thinking your business could be classified as a PSB, here are a few things to consider:
- Take a Good Look at Your Client Relationships: If you’re working with one client for an extended period and they have significant control over how you do your work, you might be in PSB territory.
- Get Organized with Your Records: This one is simple but important. Keep everything organized. Your contracts, invoices, communication, and anything that shows you’re genuinely operating as a business can help you in the event of an audit.
- Talk to a CPA: If you’re unsure whether you’re running a PSB, a CPA can help you figure it out. They can also help you navigate how to structure your business and ensure you’re maximizing available deductions while avoiding common pitfalls.
- Know What You Can and Can’t Deduct: Even if you are running a PSB, there are still a few expenses you can deduct. Don’t leave any money on the table, but also don’t make the mistake of claiming things that aren’t allowed.
We’re Here to Help You
Running a business is already complex enough without having to worry about tax classifications. But understanding what qualifies as a Personal Service Business and the tax implications that come with it can save you from unnecessary headaches down the road.
Want to talk it through? We’re happy to help you make sure you’re not leaving anything to chance. Contact us at 780.461.3800 and let’s make sure your business is set up for success this tax season.
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