Personal Service Business (PSB)

31 October, 2014

A Personal Service Business is a structure where a person sets up their own corporation (“PSBco”) and then provides services to another corporation. If it weren’t for their PSBco they would be considered an employee for tax purposes.  This is a structure that has been specifically targeted by both the Federal and many Provincial Governments to make this arrangement unattractive from a tax perspective.  Unlike most small businesses a PSB is not allowed to get the small business tax rate on the first $500,000 of earnings, and can often end up paying more tax than if they really were an employee.  This ‘carrot and stick’ approach is to encourage the owner of the PSBco to pay all income out as salary as that is the only way to bring the tax payable down.  Note: PSBco’s cannot deduct most business related expenses that any other corporation could – the allowed deductions are really limited to just those items that an employee can deduct on their personal tax returns.  Further, being self employed the now business owner loses things like Employment Insurance coverage, Employment Standards Act protections (i.e. no rights to for Severance or vacation pay) and now will be paying twice the usual amount for CPP and likely will have to pay premiums for WSIB on their earnings.
I was reading a recent report from the Canadian Tax Foundation and there was an interesting article written by a tax lawyer named H. Michael Dolson of Felesky Flynn LLP, Edmonton  titled “Stop PSB Proliferation”, Canadian Tax Highlights, vol. 22, no. 9 (Canadian Tax Foundation) (September 2014). Although I enjoyed the entire article there is one paragraph that Mr. Dolson wrote that I found to sum up PSBco’s very well.   “The fact that PSBcos are apparently becoming more common is ultimately a reflection of the power imbalance between workers and employers and the inaccurate information provided to individuals. The payer can circumvent substantially all the hard-won rights and protections for workers created during the 20th century without any corresponding benefits for the workers. Finance’s and Parliament’s approach produces an inequitable and unjust result: it imposes punitive tax consequences on the party that has less bargaining power.
What you should know is the government is aware that there are more and more PSBco’s out there and many of them are not paying the correct amount of tax and have become an increasing target for CRA audit, complete with findings of large amounts of tax owing, plus interest and penalties.  According to Statistics Canada, between 2000 and 2008 47.7 percent of companies created had one or less labour unit in their second year of operation – which is one of the ‘red flags’ that the company **may** be a PSBco.
If you think your company, or soon to be formed company, may be a PSBco it is important to meet with your tax professional so you can be satisfied that you are paying the correct amount of tax and do not have to fear a CRA audit, and what to do if you are a PSBco.  In many cases being a PSBco can be managed so that it is still financially rewarding for the business owner, but the key is knowing that in advance and then managing your affairs appropriately.  In many other cases it is possible to arrange the relationship between your corporation and its client(s) such that it would most likely not be found to be a PSB.

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