Recently, CPA Canada published an article highlighting that CRA is escalating its scrutiny of personal services businesses towards the end of 2022. CRA typically undertakes campaigns where they focus on a specific issue and cast a large net to identify taxpayers who may be in violation of certain tax rules.
This year, the CRA is taking a closer look at the personal services business (“PSB”) rules that apply when:
- An individual provides services through a corporation, and
- the individual doing the work would be considered an employee if they provided the services directly.
In other words, the campaign targets employees who set up corporations and provide their services through a corporation to their employer when there is a clear employee-employer relationship. The campaign seems to focus on incorporated truckers, IT consultants, accountants, construction contractors and caterers. These were the types of personal service businesses named in the CRA’s webinar.
A common reason service providers choose to incorporate rather than provide their services directly to their employer is for tax reasons. In Ontario, the small business corporate tax rate is only 12.2%, and as long as these service providers are willing to leave a good chunk of what they earn in their corporation, they can defer paying the higher personal taxes.
The PSB rules are meant to be highly punitive to discourage employees from incorporating. If CRA successfully finds that a corporation is carrying on PSB, the corporate tax rate increases from 12.2% to 44.5%. This is because PSBs do not get the small business deduction, and there is an additional 5% tax. Moreover, when the individual pulls the money out of the corporation, the combined corporate and personal tax rate could be as high as 66.3% (which is way higher than the top personal tax rate in Ontario of 53.53%).
You can check out our Ultimate Corporate Tax Guide For Small Business Owners and Ultimate Personal Tax Guide For Small Business Owners to see how personal and corporate tax rates work.
The CPA Canada article highlights strategies to mitigate risks and exposure when setting up a PSB. We encourage you to check It out here.
If you have any questions, feel free to reach out to us. We are happy to help you!
