Employee Versus Contractor: Part 4 (Personal Services Business)

Christopher Burns Wiu3w 99tng Unsplash

Part 4: What if a Corporation is an Employee

Back in Part 2 of Employee Versus Contractor, we mentioned that if an employee tries to incorporate, that they are assessed as a Personal Services Business (or “PSB”). Let’s take a look at what this means

The CRA often refers to PSBs as “incorporated employees”. Essentially, if you removed the corporation from the picture and the individual provided the services, then that individual would – per the factors in Part 1 – be assessed as an employee and not as an independent contractor. This differs from incorporated contractors – if you remove the corporation, then they are sole proprietors (or independent contractors).

So, what happens if your corporation becomes assessed as a PSB?

  • The expenses you can deduct for tax purposes become heavily restricted
  • You lose access to the small business deduction, resulting in higher corporate tax rates
  • You pay an additional PSB tax on all profits

Nasty! It begs the question – why would anyone want to incorporate if they might be at risk of being a PSB?

  • From the court case that led to the introduction of PSB legislation (Sazio v. MNR1), the court opined that the scheme:
    • Provided access to tax benefits that were intended for corporations, not employees
    • Allowed an individual who was an employee to split income with other individuals (notably no longer a significant concern due to Tax on Split Income (TOSI) legislation)
  • Sometimes, the employer requires it (so the employer can access certain benefits like not needing to pay CPP or EI)

Deciding if the risk is worth it is a decision each individual must make for themselves. Owning a PSB is not wrong – it just takes more planning to deal with effectively. The biggest issue is when you believe yourself to be a bona fide business operating through a corporation and then the CRA assesses your corporation to be a PSB – in these cases, we cannot back-date the planning and so the tax impacts can become severe.

If you operate a corporation that works for a single payer (or a single group of payers) and feel you may be an “incorporated employee”, we recommend getting in contact as quickly as possible to ensure proper review is done and plans are put in place to minimize your risk.

1: Sazio v MNR, [1968] C.T.C. 579, 69 D.T.C. 5001, [1969] 1 Ex. C.R. 373 (Ex.)

Jaden Evanson