CRA/ARC: Are you a Personal services business? With the second phase of the PSB Pilot project, the Canada Revenue Agency is helping you understand your tax obligations

Dec 4, 2023

Are you a personal services business?

With the second phase of the PSB Pilot project, the Canada Revenue Agency is helping you understand your tax obligations.

 

To provide services to another company, you may choose, or be asked, to incorporate your services. If you are an employee of your corporation and you offer services to another company, the Canada Revenue Agency (CRA) may consider you to be operating a personal services business (PSB).

A PSB has specific tax obligations and is not allowed to claim certain deductions and expenses, such as the small business deduction. These differences are important for you to know, as there could be financial consequences if you misfiled your taxes.

With the PSB Pilot project, the CRA is offering you a personalized review of your situation, to help you understand the tax obligations associated with being considered a PSB for tax purposes.

 

What is a PSB?

Generally speaking, a personal services business exists where the individual performing the work would be considered to be an employee of the hiring company if it were not for the existence of the corporation. A PSB would be in a subordinate relationship with the hiring company, very similar to what an employee would have with their employer.

A corporation may be operating a PSB if the certain conditions are met, as outlined in the Income Tax Act (ITA).

 

We are here to help – PSB Pilot

In 2022, the CRA launched a pilot to analyze the business practices of operating as a PSB to help plan future outreach, education, and enforcement. During each phase of the pilot, officers from the CRA will be reaching out to employers and/or potential PSBs.

This ongoing phased approach will focus on educating taxpayers and business owners as we move towards full compliance. By using this method, employers and PSBs will have time to assess their own employment relationship and understand the tax obligations that goes with it.

Phase I – Identifying hiring clients and industries

The first phase took place between June and December 2022 when CRA officials contacted more than 2,100 Canadian corporations with the potential to be hiring PSBs. Businesses who chose to participate submitted their financial books and records for review. The CRA provided them with feedback and information about their T4A filing requirements.

 

Phase 2 – Identifying potential PSBs

Phase 2 of the PSB pilot began in October 2023 and will run until June 2024. CRA agents will be examining a random sampling of approximately 2,100 accounts of potential PSBs. These accounts are different than for Phase 1 and were selected from a large sample to provide insight across multiple industries to better identify potential PSBs.

The objectives of Phase 2 are to gain greater insight into the PSB population, including learning more about how and why they operate using this business model and to better assess the level of compliance related to PSB’s obligations.

This educational outreach phase will allow the Agency to further its understanding of PSB behaviours and promote future compliance.

 

PSBs’ tax obligations are different

PSBs are subject to specific rules in the Income Tax Act such as being responsible for filing a T2 Corporation Income Tax Return as an incorporated business, in addition to filing an individual Income Tax and Benefit Return.  Amounts paid by one corporation for services provided by another corporation must be reported on a T4A slip(s). PSB are also responsible to meet GST/HST obligations, as well as providing accurate T4 statements to any employees of the corporation.

PSBs are not eligible for the small business deduction nor the general tax rate reduction available to other corporations. As a result, a PSB will be subject to the full federal and provincial corporate tax rates as well as an additional 5% tax on PSB income. Finally, PSBs are also limited in the expenses they may deduct, such as salary, wages, benefits or allowances.

 

Need more information?

For more information on personal services businesses, see tax implications for a personal services business. For information on reporting requirements for employees, self employed individuals, and personal services businesses, see our withholding and reporting requirements.

If you believe you are operating as a PSB 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.

 

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