1.Will my incorporated professional contractor business be deemed a Personal Services Business (PSB)?
That depends on a variety of factors, and is a very complicated and subjective question.
Many websites and tax professionals try to give a simple and exact definition, and sometimes point to changing a few attributes of the relationship to resolve the problem. Unfortunately, there is often no easy determination of whether a PSB does or does not exist. It is a very subjective question based on the entirety of the exact facts of a particular business. No single common attribute is determinative.
To start to understand the determination, one needs to understand the related tax law, the precedent tax cases in the court system, the mindset of judges who make the precedent cases, resulting Canada Revenue Agency (CRA) policy and the mindsets of CRA officials.
Many professionals – including accountants – look to do a logical and scientific analysis of the specific legislation, and derive a conclusion accordingly on whether a PSB does or might exist. But the law tends to be more of an art than a science. Judges have a tendency to get a feel for what they think is a just solution, while they weigh the specific legislation, any related legislation, the perceived intent of the legislation, precedent cases and given arguments to reach a final determination.
Your exact factual situation needs to be examined by an appropriate tax professional to determine how your situation compares to what CRA or a tax court would consider a PSB.
Kirk Wormley Professional Corporation has over 15 years experience working with incorporated professionals and the Personal Services Business issue.
2.What is the definition of a Personal Services Business (PSB)?
Loosely restated - tax legislation defines a PSB to be a business that a corporation carries on to provide services to another entity, where the service is provided by one of the principal shareholders of the corporation, and that principal would reasonably be regarded as an employee or officer of the other entity if the corporation did not exist.
Canada Revenue Agency (CRA) has a modified definition, however. They state that. “A personal services business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform.”
These definitions appear very similar, but there are two very significant distinctions. The definition in tax legislation states that the worker would is considered to be an employee, which firstly implies that they have the attributes of an employee. Secondly, it implies there must be an employer-employee relationship that exists, which further implies that there must be a distinct employer.
The CRA definition firstly deletes the need for a distinct employer to exist. Secondly, the CRA definition implies that the worker is not necessarily regarded as having the attributes of an employee, rather they only need to be doing the work that is typically done by an employee.
The judgements in some tax court cases have lent some support to the possible deletion of the need for there to be a distinct employer, but I believe that the courts are still looking for employee attributes.
3.What is the intention of legislation regarding Personal Services Businesses?
The intent of the law is to prevent a tax advantage from being obtained by recharacterizing an employee to be something different than an employee merely by the creation of a different legal structure.
4.What are the implications of being a Personal Services Business (PSB)
A.There is an increase in tax rate. Firstly, there is no small business deduction. So, in Alberta for 2020 for example, instead of a tax rate of 9% federally and 2% provincially, the corporation pays 15% federally and 10% provincially. Additionally, there is no general tax reduction which adds another 13% federally. The result for an Alberta corporation is the tax rate changes from 11% to 38%. An additional 27%.
B.Deductions are limited, similar to what an employee might be allowed to deduct. Such that the taxable income upon which the tax rate is based is larger.
C.If the corporation files as a non-PSB and is later found to be a PSB, the additional tax will be applied and fairly heavy penalties and interest may also be applied.
D.More than one year may be audited at a time, and the total taxes, penalties, and interest may exceed one year’s income.
These rates and penalties are intentionally very high and punitive and are designed to heavily deter the set up of an undeclared PSB.
5.What is the attitude of CRA towards PSB’s?
Historically, the CRA seemed to look at undeclared PSB’s like any other inappropriate tax deduction. However, over recent years the penalties have become substantially more punitive, and CRA has become seemingly more offended and aggressive toward potential PSB’s.
6.Will running my incorporated business through a third-party placement agency negate the potential of being considered a PSB?
A logical look at the exact wording of legislation would seem to indicate that running your business through a third-party placement agency should be sufficient to negate the possibility of being considered a PSB.
However, a couple of court cases involving the determination of PSB status where a business was working through a third party, have found the businesses to be Personal Services Businesses. The judges in these cases have seemingly ignored the existence of the third party without any explanation as to why.
So, although a future court case may reverse this view, or at least explain why the third party is ignored, the current state of the law would mostly indicate that running through a third party would not negate the potential of being considered a PSB.
7.Will running my business through a trust negate the potential of being considered a PSB?
Considering the court cases where third-party placement agencies were largely ignored, one might predict that the courts would also ignore the existence of the trust – see Question 6 above.
Further, CRA’s definition of what is a PSB would seem to indicate that the entire legal structure is irrelevant in their eyes, and one might predict that they would ignore the existence of the trust as well – see question 2 above.
So, it would seem that running your business through a trust would not negate the potential of being considered a PSB.
8.My contract says that I am an independent contractor and not an employee, so will CRA still consider me to be running a Personal Services Business (PSB)?
Technically, what any contract says is mostly irrelevant, as it is the functioning relationship that is the determining factor, not the contractual one. So, although what is written in a contract may have some influence on the perceptions of a CRA auditor or a judge, it will not likely carry a lot of weight in the determination.
9.Is there a practical solution to the Personal Services Business (PSB) issue?
Usually, there is a practical solution based on the contractor’s individual situation that is amenable to the contractor, that the contractor can be reasonably happy to conduct business through. Occasionally, the contractor may look to a more complicated solution, but it is not that common.
An appropriately skilled tax professional should be able to determine your risks and alternative tax solutions.
Kirk Wormley Professional Corporation has over 15 years of experience working with incorporated professionals and the Personal Services Business issue.
(The foregoing is a general discussion of PSB issues and is not intended to be a substitute for professional tax advice. Taxpayers should consult an appropriate tax professional for assistance with Personal Services Business tax issues).