Brampton, Ontario (416) 917-9850 [email protected]
BusinessSapience Inc.
Menu
Services Approach Insights Knowledge Base About Contact us

Home / Knowledge base / Corporate & Compliance

Corporate & Compliance

Personal services business (PSB): what incorporated contractors should know

When an incorporated contractor is treated like an employee for tax purposes, what it costs, and how to reduce the risk.

Business Sapience Inc. · Last reviewed · 5 min read

Key points

  • A PSB is a corporation whose owner would reasonably be regarded as the client's employee if the corporation did not exist.
  • PSB income loses the small business deduction and most expense deductions.
  • The real working relationship, not the contract wording, is what counts.

What a PSB is

A corporation carries on a personal services business when it provides services through an individual who owns 10% or more of its shares (an "incorporated employee"), and that individual would reasonably be regarded as an employee of the client if the corporation were not there. The employee-or-contractor factors in our guide apply.

There are two exceptions: the corporation employs more than five full-time employees throughout the year, or the services are provided to an associated corporation.

The cost

  • No small business deduction. PSB income is taxed at the general corporate rate plus an additional 5% federal tax, roughly 44.5% combined in Ontario compared with about 12.2% for small business income.
  • Deductions are limited mainly to salary and benefits paid to the incorporated employee and certain legal costs of collecting fees.

Reducing the risk

  1. Written agreement that reflects real independence: control over methods and hours, the right to subcontract, no exclusivity, and responsibility for your own costs and insurance.
  2. Project-based pricing with defined deliverables rather than open-ended hourly work.
  3. Your own tools, systems and workspace.
  4. Other clients, or documented efforts to find them: a website, proposals, marketing.
  5. Avoid the trappings of employment: titles, performance reviews, a client email address, or a place on the client's org chart.

Limiting the damage: paying the corporation's net income out as salary each year means little income is left to be taxed at the PSB rate. Salary brings CPP contributions, but also RRSP room.

Official sources

Related articles

Need help applying this to your business?

We work with owner-managed businesses on financing packages, workflows and accounting systems, as fixed-fee projects with clear deliverables.

Book a discovery call