CRA Campaign Focuses on Personal Services Businesses (PSB)

The Canada Revenue Agency has new campaign focused on personal services businesses (PSB). The consequences to the tax payers can be severe if the incorporatred busienss is assessed as PSB.  

The PSB rule will apply when an individual or a person related to him/her provides services on behalf of corporation: 

1. the individual is a specified shareholder

2. the individual is considered an incorporated employee

3. the corporation does not have more than five full-time employees

   
   

A specified shareholder is a taxpayer who owns, directly or indirectly at any time in the year, at least 10% of the issued shares of any class of capital stock of the corporation or a related corporation.

CRA consider the following factor to determine whether an emplyee is an incorporated employee (the same factors used to decide whether an individual is employed or self-employed):

• control – the degree of control exercised by the payer over the service provider’s duties

• tools and equipment – whether the payer uses their own tools to perform the services

• ability to subcontract –  whether or not the service provider must carry out the work personally or if they can hire or subcontract the work

• financial risk –  whether or not the service provider has an investment in their business

• opportunity for profit –  whether the service provider has both a chance of profit and a risk of loss

• multiple clients –  whether the corporation is providing similar services to other clients  

The company can manage the PSB risk using the following methods:

• pay out corporat erning as a salary. Any accrued but unpaid remuneration is only dedutible whwen paid. 

• Document the relationship in a written agreement. Please be aware that even with the agreement in place, it is possible taht CRA considers that an employment relationship exists.