The Canada Revenue Agency (CRA) will be increasing their focus on personal services businesses and assessing for breeches of tax rules, according to an update from CPA Canada on September 6, 2022.

With more Canadians choosing to incorporate their businesses, the CRA will be analyzing if a corporation is operating as a personal services business and what that corporation’s tax situation is. They will be examining the personal services business rules that apply when services are provided through a corporation and if the individual providing the services should be considered an employee.

What Is a Personal Services Business?

Individuals who provide services to businesses and who are incorporated may be considered personal services businesses. It is common practice for hiring companies to require individuals to incorporate to limit liability in industries such as trucking, IT, accounting, construction, and catering.

However, if you register yourself as a corporation to perform services for a hiring business and they are the only or primary source of revenue for your corporation, you may be considered to be operating a personal services business.

Tax Rules for Personal Services Businesses

Personal services business tax rules apply when:

• There is an individual who renders services on behalf of the corporation (an “incorporated employee”)
• The incorporated employee or any related person directly or indirectly owns 10% or more of the issued shares of any class of the corporation or of any related corporation (a “specified shareholder”)
• The incorporated employee would be considered an officer or employee of the client but for the existence of the corporation
• The incorporated employee does not employ more than 5 full time employees
• The services are not being provided to an associated corporation
• The corporation’s income is from services performed by the provider on the corporation’s behalf

When personal services business tax rules apply, there are two primary tax outcomes:

1. A higher corporate tax rate on personal services business income
   • Any income that is determined to be from personal services business would not be eligible for the small business deduction.
   • In addition to a higher federal tax rate, the provincial tax rate on income from personal services businesses is higher than other income
2. A limitation on the corporation’s expense deductions
   • Deductions that a corporation can claim when considering personal services business income are limited to:
     • Salary paid to the incorporated employee
     • Employment benefits for that individual
     • Expenses that would be allowed if the individual were a commissioned salesperson
     • Legal expenses incurred by the corporation to collect amounts owing to it

Tips for Managing Personal Services Business Tax Risks

To avoid tax consequences of unexpectedly earning personal services business income, consider these suggestions for managing that risk.

1. Pay out corporate earnings as salary
2. Clearly document relationships stating that the parties have not agreed to an employment relationship
3. Document the level of autonomy the corporation has
4. Consider risk when planning remuneration
5. Consider obtaining a ruling from CRA

Information on CRA Requirements for Personal Services Businesses

To make sure all personal services business owners are aware of the tax rules that apply to them, the CRA hosted a webinar and sent stakeholder emails to educate corporations and advisors on the subject.

The CRA is also contacting Canadian businesses until December 2022 to gather documentation about payer/payee relationships. Should you be contacted, your participation is voluntary. If you participate, you will be provided with guidance on correcting any errors that might be found.

Help Navigating CRA Requirements for Personal Services Businesses

We work with our clients to ensure compliance with all CRA requirements you are subject to, and to maximize your tax savings opportunities.

To become a KWB client, book a free consultation here.