On July 21, 2022 CRA sent out a communication in respect of a personal services business (PSB) project that has just commenced, running from June 2022 to December 2022.
The communication notes that CRA officers will be reaching out to businesses from a sample of different industries that hire PSB or incorporated individuals operating as a PSB to help them determine whether or not they are fulfilling their tax obligations. CRA will ask them to provide documentation on the nature of their payer/payee relationship.
Participation is on a voluntary basis. No compliance action will result from the review, but businesses will be advised to ensure errors are corrected and that they comply with the ITC.
What is a personal services business?
If you register yourself as a corporation to perform services for a hiring business, you may be considered to be operating a PSB. This structure is sometimes referred to as an incorporated employee.
The CRA might consider your corporation a personal services business (PSB) if:
- you, as the incorporated employee performing services, or any person related to you, is a specified shareholder of your corporation
- If your corporation did not exist, you, as the incorporated employee, would be considered an employee of the hiring business receiving your services
- your corporation does not employ more than 5 full-time employees throughout the tax year
- your corporation’s income is from services performed by you, as the incorporated employee, on behalf of your corporation
Note that a specified shareholder is a taxpayer who owns, directly or indirectly at any time in the year, at least 10% of the issued shares of any class of capital stock of the corporation or a related corporation.
In other words, an individual who chooses to incorporate their business in order to provide services for one other company might be considered to be operating a PSB. In this case the company receiving the services would be considered the payer – a person or company who pays the worker or corporation for their services. A PSB exists where the individual would be considered to be an employee of the payer if it were not for the existence of the corporation. This individual is sometimes referred to as an incorporated employee.
Let’s look at an example.
John is looking for a job. An Ontario-based trucking company (ABC Trucking) offers him a 12-month contract position with full-time hours. The contract comes with the stipulation that John perform his services through a corporation.
John incorporates his business (123 Ontario Inc.), for which he is the only shareholder and only employee. 123 Ontario Inc.’s only client is ABC Trucking.
123 Ontario Inc. bills ABC Trucking for the services it performs, and it receives payment from ABC Trucking for those services. 123 Ontario Inc. either keeps the funds in the corporation or disburses them to John.
In this example, 123 Ontario Inc. meets the conditions outlined in the Income Tax Act to be considered a personal services business:
- John is a specified shareholder of 123 Ontario Inc.
- John performs the work of an ABC Trucking employee using their trucks, and would therefore be considered an employee of ABC Trucking had he not incorporated as 123 Ontario Inc.
- John is the only employee of 123 Ontario Inc.
- 123 Ontario Inc.’s sole income is from services performed by John (incorporated employee) for ABC Trucking.
If you are considered to be operating a personal services business by the CRA, your tax obligations are different from other corporations.
The federal corporate tax rate is 38% and after the federal abatement of 10%, is reduced to 28%. PSBs are not eligible for the small business deduction, or the general tax rate reduction. Effective for the 2016 tax year and beyond, PSBs are subject to an additional tax of 5%, bringing their total federal corporate tax rate to 33%.
In addition to the federal tax, PSBs are also subject to provincial/territorial corporate tax rates.
For example, in Ontario, the current provincial corporate tax rate is 11.5%. Therefore, a PSB in Ontario will be subject to a total corporate tax rate of 44.5%. This includes both the 33% federal corporate tax rate and the 11.5% provincial corporate tax rate.
Furthermore, PSBs can only deduct specific business expenses from income, such as:
- the salary and wages the corporation pays to its incorporated employee;
- any benefit or allowance the corporation provides to its incorporated employee;
- legal expenses the corporation incurs for collecting amounts owing to it.
Amounts paid by one business to another business for services provided is considered as income not salary or wages and therefore, the amounts are not subject to statutory payroll deductions. This means that you do not withhold income tax, CPP and EI on these amounts.
However at year-end, the corporation will be required to pay corporate income tax on all income earned to the CRA by the corporate tax filing and payment deadlines.
Like other corporations, a PSB is required to file a T2 Corporation Income Tax Return and must file its return no later than six months after the end of each tax year. The tax year of a corporation is its fiscal period.
When the corporation’s tax year ends on the last day of a month, the return must be filed by the last day of the sixth month after the end of the tax year.
When the last day of the tax year is not the last day of a month, the return must be filed by the same day of the sixth month after the end of the tax year.
For example:
- If your tax year ends March 31, your filing due date is September 30.
- If your tax year ends August 31, your filing due date is February 28.
- If your tax year ends September 23, your filing due date is March 23.
When operating a PSB, if you pay salary and wages from your corporation, you will have to withhold income tax, CPP and, in some cases, EI. These amounts must be remitted to the CRA along with the employer’s share by the due date.
At the end of the year, the corporation will have to report the income paid to employees and the deductions on a T4 slip (Statement of Remuneration Paid). Employers must provide employees with a T4 slip by the end of February each year. For more information, see Guide RC4120, Employers’ Guide – Filing the T4 Slip and Summary, on the Canada.ca website.
The corporation has to register for a payroll program account before the first remittance due date. The first remittance due date is the 15th day of the month following the month in which the corporation began withholding deductions from the employee’s pay, unless the CRA tells the corporation to remit using a different frequency.
If a worker or a payer is not sure of a worker’s employment status, either party can ask for a ruling to have the status evaluated after the parties have entered into a contract, since it is based on the facts of the working relationship. A ruling indicates whether a worker is an employee or is self‑employed, and whether that worker’s employment is pensionable and/or insurable.
A worker or an employer can ask for a ruling before June 30th of the year following the year to which the question relates. For example, if the employment took place in 2016, the ruling request has to be made before June 30, 2017.
If you are a payer and are registered on My Business Account, you can use the “Request a CPP/EI ruling” service in My Business Account.
If you are a payer or a worker and are registered on My Account, you can use the “Request a CPP/EI ruling” service in My Account.
An authorized representative for the payer can also ask for a ruling online through Represent a Client.
A payer or a worker can ask for a ruling by sending a letter or a filled out Form CPT1, Request for a CPP/EI Rulings – Employee or Self Employed to their tax services office.
You can get this form under “Forms and publications” on the CRA website or by calling 1-800-959-5525.
It is important to note that workers and payers are free to set their affairs as they wish, but they must make sure that whatever status they have chosen is supported by the actual facts of the working relationship.
If you are not sure whether the workers you employ are considered an employee, you can refer to these indicators to assess the facts surrounding your relationship.
A worker is considered an employee when:
- The relationship is one of subordination. The payer will often direct, scrutinize, and effectively control many elements of how and when the work is carried out.
- The payer controls the worker with respect to both the results of the work and the method used to do the work.
The payer chooses and controls the method and amount of pay. Salary negotiations may still take place in an employer-employee relationship.
- The payer decides what jobs the worker will do.
- The payer chooses to listen to the worker’s suggestions but has the final word.
- The worker requires permission to work for other payers while working for this payer.
- Where the schedule is irregular, priority on the worker’s time is an indication of control over the worker.
- The worker receives training or direction from the payer on how to do the work.
In an employer-employee relationship, the payer is considered an employer and the worker an employee.
If you believe you might be operating a personal services business and would like to correct the tax return(s) you previously filed, you can contact the CRA’s Voluntary Disclosure Program to determine if you meet the eligibility requirements and submit an application.
Contact us to learn how these rules impact your particular situation.
Sources:
