Are you incorporated but perform the duties of an employee? You might be a personal services business. Know your tax obligations.

Jun 29, 2022

In certain industries, you may choose, or be asked, to incorporate for work. However, it is important that you are aware of how being incorporated might affect your tax obligations.

An individual may choose to incorporate their business in order to provide services to one other company (also known as the payer – a person or company who pays the worker for their services). In doing so, the CRA might consider the corporation to be a personal services business (PSB). Generally speaking, a PSB exists where the individual  would be considered to be an employee of the payer if it were not for the existence of the corporation. This individual is sometimes referred to as an incorporated employee.

Personal services businesses are subject to specific rules in the Income Tax Act. Personal services businesses are not eligible for the small business deduction and the general rate reduction available to other corporations. As a result, a personal services business will be subject to the full federal and provincial corporate tax rates on all taxable income. There is also an additional 5% tax for personal services businesses on its taxable income.

PSB’s are responsible for meeting their corporation’s GST/HST obligations, as well as providing accurate T4 statements to any employees of the corporation. While amounts paid by one corporation for services provided by another corporation are not subject to payroll deductions, such as CPP and EI, amounts paid to a personal services business must be reported on a T4A statement(s).

A corporation that is operating a personal services business is required to file a T2 Corporation Income Tax Return and pay any amounts owing to the CRA by the corporate tax filing and payment deadlines like other corporations. As well, the incorporated employee is responsible for filing a personal income tax and benefit return. An incorporated employee is responsible for knowing their corporation’s tax obligations.

In addition, personal services businesses are limited in the expenses they may deduct. Examples of expenses that may be deducted by a personal services businesses are:

  • the salary and wages the corporation pays to its incorporated employee(s);
  • any benefit or allowance the corporation provides to its incorporated employee(s);
  • certain expenses of the corporation associated with selling property or negotiating contracts; and
  • legal expenses incurred by the corporation in collecting amounts owing.

If you believe you are operating as a personal services business and your tax returns have been misfiled, the voluntary disclosures program may be an option to help you correct them, if you meet the eligibility requirements.

Need More Information?

 

The CRA can help you understand your reporting obligations and how they can change depending on your worker-payer relationship. For more information on personal services businesses, see tax implications for incorporated employees. For information on reporting requirements for employees, self employed individuals, and personal services businesses, see our withholding and reporting requirements.

 

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