Do you provide IT services on a consultancy basis? You need to understand how the personal services you offer as a consultant or contractor are subject to taxes. Personal services business rules have changed which is why it’s very critical to know if the CRA will consider your business as a PSB.
What’s a PSB?
PSB or personal services business is described by the CRA as a business that a corporation conducts to provide services to another entity that could otherwise be provided by an officer or employee of that entity. This means that you do not have other clients that you are working for and would be considered an employee if it weren’t for that corporation. The PSB rules for IT contractors and consultants have changed and failing to plan ahead can have a negative impact on your tax bill.
How Personal Services Business Can Increase Your Corporation’s Taxes
With the new personal services business rule, you will not be able to take advantage of the small business deduction which usually helps corporations to save on taxes. Additionally, you will be required to pay a special penalty tax. Deductions for expenses that you incur as a result of the PSB will also not be allowed. All this could significantly increase your tax bill. You may pay a tax rate of up to 39.5% higher than what you were initially without incorporating a PSB.
Is Your Corporation a PSB?
There are several factors used by the tax authorities to determine if your corporation is a PSB.
Access to Tools and Equipment
If your business is considered a PSB, then the employer will be responsible for providing you with all the tools and equipment needed to do your job. This includes things such as the computer, software and photocopy machines. you will still be considered a PSB if your employer will reimburse you for any tools or equipment you have purchased to do your job.
Do You Hire Subcontractors?
In a PSB, the employer doesn’t allow you to hire other people such as subcontractors to help complete the project. If this is allowed, the CRA may not consider you as a personal services business.
Do You Take Any Financial Risks?
A personal service business doesn’t allow employees to take any financial risks such as being liable to end customers if the project fails or bad debts that result in lack of payment. Additionally, if you are likely to be considered as a personal services business if you are financially dependent on your employer. This means that your employer is the only customer you have as opposed to having multiple other customers that you offer your services to.
The Level of Control Over Employees
The CRA will determine how much control your employer has over how you perform your work. If you have to report daily or regularly to a supervisor and there’s a lot of control over your work activities then your business is likely to be considered a personal services business. Understand what the CRA is looking for when determining whether a business is a PSB. You can work with an accountant to help you avoid the strict PSB rules.