The Role of a Personal Services Business (PSB) in Canadian Taxation

April 14, 2025
The Role of a Personal Services Business (PSB) in Canadian Taxation

Introduction

A Personal Services Business (PSB) is a special classification under Canadian tax law that applies to incorporated individuals who provide services to a single client but do not qualify as independent contractors. The Canada Revenue Agency (CRA) considers PSBs to be disguised employment, meaning they face strict limitations on deductions and are subject to higher tax rates.

 

Understanding the tax implications of a PSB is critical for incorporated professionals and consultants who want to avoid costly penalties and minimize their tax burden.

 

1. How Does the CRA Define a Personal Services Business?

The CRA considers a corporation to be a PSB if it meets the following criteria:

  • The individual providing the service would be classified as an employee if the corporation did not exist.
  • The business does not have multiple clients or operates under conditions similar to employment.
  • The corporation does not employ at least five full-time employees throughout the year.

 

2. What Are the Tax Implications of a PSB?

A PSB is taxed at a significantly higher rate than a standard business:

  • Higher Corporate Tax Rate: Income from a PSB is subject to a flat rate of 33%, compared to much lower small business rates available to active businesses.
  • Limited Expense Deductions: Unlike regular corporations, a PSB can only deduct very limited expenses, such as salaries paid to employees and legal fees.
  • No Small Business Deduction: PSBs do not qualify for the Small Business Deduction (SBD), which reduces tax rates for Canadian-controlled private corporations (CCPCs).

 

3. How to Avoid Being Classified as a PSB

  • Work for multiple clients instead of relying on a single employer.
  • Establish a contractual relationship that reflects an independent business rather than an employee relationship.
  • Hire at least five full-time employees to meet CRA’s exemption criteria.
  • Structure engagements with clients to ensure control over work schedules, methods, and tools used.
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Conclusion

Being classified as a PSB can lead to higher taxes and fewer deductions, making it essential for incorporated individuals to structure their business properly. By understanding CRA criteria and taking proactive measures, professionals can avoid PSB classification and maximize tax efficiency. 

 

Tax Partners can help incorporated professionals navigate PSB rules, ensuring compliance while minimizing tax burdens.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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