The term Personal Services Business, also known as PSB, may not be familiar to you, especially if you are an employee or head of a company with more than 6 full-time employees. On the other hand, if you are an entrepreneur and work as a self-employed person, you should recognize this term. Indeed, it falls under the Income Tax Act and can have significant tax consequences for entrepreneurs that can be highly penalizing for a young company.
Find out about the personal services business tax term and its key features.
The Canada Revenue Agency (CRA) assigns the personal services business determination when a company provides services that can be performed by an employee of the client company and when the latter provides the toolset and equipment needed to deliver the services.
This means that if you are an entrepreneur and perform work within a client organization as if you were an employee, you are likely to receive the PSB tax determination. In fact, your client relationship could be perceived as an employee-employer relationship and you would therefore have the status of an incorporated employee rather than self-employed person. Being granted this status can have a significant impact because you would no longer qualify for the small business deduction (SBD) and can no longer deduct your business expenses.
In order to preserve your business and avoid being an incorporated employee, it is essential to know the criteria that determine the employee-employer relationship. The CRA considers a number of factors in determining whether a consultant should be considered a personal services business. Here are the 6 main criteria analyzed:
In order to avoid a possible new corporate tax status, it is worth reading and understanding all the criteria analyzed by the Canada Revenue Agency.
In order to define whether a business meets the criteria of a PSB, the Revenue Canada Agency is interested in many points regarding the payer's control over all of the activities performed by the external worker.
They will therefore consider the following points:
A self-employed worker is usually unsupervised. He works whenever and wherever he wants as long as his assignment is carried out. Moreover, he has no obligation of loyalty or security.
One of the most important criteria is the ownership of the tools and equipment needed to carry out the work. In effect, the CRA regulates who supplies the work equipment whether tools, desks or any other equipment. If the client organization owns the equipment and makes it available to you, then you are more likely to be perceived as a personal services business. In order to maintain your status as a self-employed person, it is recommended that you obtain your own equipment.
The Revenue Canada Agency will also focus on various aspects of the financial risk incurred by the consultant, namely:
In order not to be considered a personal services business, it is essential to clearly establish the working relationship between the worker and the client company. To this end, it is recommended to first write a contract, listing all the working conditions defined between the two parties. However, even if the common agreement and the written agreement are clear, the actual working conditions may be different.
To emphasize your status as a self-employed worker, be the boss of your work and your organization. Define your own work schedules, decide the different tasks and their implementation, have your own materials and, if possible, hire someone to assist you in your work.
Do you have doubts about the sustainability of your self-employment status and believe that you are likely to receive the tax status of a personal services business? Get a tax expert’s advice by contacting the T2inc team. We can discuss your professional situation and provide you with the necessary guidance to maintain your status.
