My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Tuesday, January 24, 2012

Is Your Corporation a Personal Service Business?

One of the first blogs I wrote was "I am a Contractor Unless CRA Says Otherwise" (Note: the link is being temperamental, so if you want to read that blog, either google it or it is listed as a favourite post on the right hand side-bar). In that blog I discussed the various criteria the CRA and the courts use to determine whether a person is an employee or a contractor. I then further discussed the income tax withholding issues that arise when the CRA attempts to re-characterize a contractor as an employee. Finally, I touched upon the concept of a personal service business (“PSB”) and the risk of incorporating if you are a contractor. In today’s post, I will expand on the PSB discussion.

For CFL fans of my vintage, the PSB rules came about because of the despised Ralph Sazio (despised if you were a Toronto Argonaut fan). Mr. Sazio, a member of the CFL Hall of Fame who led the Hamilton Tiger-Cats to three Grey Cup championships, decided he would incorporate a company to provide his services to the Tiger Cats to benefit from the low corporate tax rate. The CRA took Sazio to court, but Mr. Sazio won his case prompting the CRA to implement the PSB rules.

The PSB rules have reared their ugly head recently because of a CRA crackdown on IT consultants as discussed in this Ottawa Business Journal article by Peter Kovessy titled Taxman cracks down on IT consultants.

In addition, on October 31, 2011 the CRA released draft legislation that imposes further punitive rules on PSB's by removing the general rate deduction previously allowed. These new rules will become effective for taxation years beginning after October 31, 2011 and are discussed below.

The PSB rules deal with incorporated employees. Essentially, when a corporation has been interposed between what one would normally consider an employee-employer relationship, the employee becomes an "incorporated employee". As I have discussed in many prior blogs, incorporation is advantageous because it provides the following: access to the small business deduction and the related low income tax rate, a possible deferral of income tax, limited liability, and potential access to the $750,000 capital gains exemption on qualifying small business corporation shares.

In reviewing the PSB rules, you essentially need to ask yourself if you would reasonably be regarded as an employee or officer of the person or partnership to whom you are providing the services, but for the existence of your corporation . If you only have one or two clients and your corporation does not employ more than 5 full-time employees, and you do not meet the criteria I discuss in my contractor blog, you risk being characterized as a PSB.

So what are the income tax consequences of being considered a PSB once the new legislation is passed?

The corporation will be prevented from claiming the small business deduction, both federally and provincially, and as noted above, you will no longer even get the general rate reduction. In Ontario that means the corporation will be subject to income tax at a rate of 39.25% (in 2012). For comparative purposes, the current small business income tax rate is 15.5%. As a consequence, when taking money out of a PSB by way of dividends, the ultimate combined personal and corporate tax rate will approach 58% in Ontario, a very punitive amount which is 12% greater than a high-rate employed taxpayer would pay.

When determining the taxable income from a PSB, the only eligible deduction for the corporation will be any salary and benefits paid to the incorporated employee (yes, that means no other expenses such as travel, office supplies and auto are allowed). If the incorporated employee is a salesperson receiving commissions, expenses paid by the corporation that would have been allowed as a deduction to the individual personally as a commissioned salesperson will be allowed.

If you are concerned that your corporation may be a PSB, a conservative approach would be to pay yourself salary rather than using a dividend remuneration strategy. You may also want to avoid income splitting with family members who are not shareholders, however, your other business deductions are still at risk of being disallowed.

The proposed PSB rules are very punitive. If you may be an “incorporated employee” you should review your situation in detail with your accountant.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

145 comments:

  1. Well, now you've got me all paranoid.

    I am in Ottawa, and have a very common type of setup: I am incorporated, my corporation has signed a contract with a headhunter who won a contract to supply services to DND (using my resume).

    DND supplies my computer, telephone and work station, but I have signed nothing with them except a non-disclosure agreement. I appear on their telephone lists, but am clearly identified as a contractor.

    I invoice the headhunters, who do not direct me (and who hardly see me).

    How could I be considered an employee of either one? And how is it fair to retroactively (!) call me an employee of one or the other or both, costing me significant taxes, without either forcing DND to give me benefits and pension, or forcing the headhunters to cough up CPP, EI and severance?

    ReplyDelete
  2. Anon, fair or not, you may have some income tax risk in this situation. I would speak to your accountant or engage an accounant to review your specific situation and if they feel you have some risk, discuss how to mitigate the risk. I am sympathetic to your plight, but as noted in the Ottawa Journal link above, there are many IT consulants who probably feel the same. Again, get some advice, your situation needs to be reivewed.

    ReplyDelete
  3. If I may pick your brain for free:

    (1) If filed as ABI but later deemed PSB, which of the following corporate deductions would be disallowed:

    -accrued wages payable to the "incorporated employee", but not paid in the corp tax year
    -bonus declared and paid within the 180 day limit, but
    not paid in the corp tax year
    -actual wages paid in the corp tax year to spouse/shareholder for actual time spent bookkeeping and researching nasty topics such as this
    -accrued wages for said spouse for actual work performed in corp tax year but not paid until after the year end
    -expenses paid for travel to perform work at special work site for which a valid TD4 was completed. includes mileage, housing, meal allowance.
    -WCB premiums and liability insurance

    (2) Does the phrase "tax years beginning after Oct 31, 2011" include for example a corporation with a tax year running from Sep 1, 2011 to Aug 31, 2012? Meaning that all of the income in the tax year ending Aug 31, 2012 continues to qualify for the general rate reduction if denied SBD?

    Thanks!

    ReplyDelete
  4. Anon, since you were so polite; see my comments below each of your questions.

    If filed as ABI but later deemed PSB, which of the following corporate deductions would be disallowed:

    -accrued wages payable to the "incorporated employee", but not paid in the corp tax year

    BBC says: the wages must be paid in the year to the incorporated employee to be deductible, thus the accrued wages would be denied. However, the wages would be deductible in the year of payment, so timing issue, not an absolute deduction loss.

    -bonus declared and paid within the 180 day limit, but not paid in the corp tax year

    BBC says: same as above, the bonus accrued would be denied. However, again the bonus would be deductible in the year of payment.

    -actual wages paid in the corp tax year to spouse/shareholder for actual time spent bookkeeping and researching nasty topics such as this


    BBC says: wages to shareholder are deductible, wages to spouse not allowable unless he/she is an incorporated employee.

    -accrued wages for said spouse for actual work performed in corp tax year but not paid until after the year end

    BBC says: not deductible, would only be allowed when paid if spouse is incorporated employee

    -expenses paid for travel to perform work at special work site for which a valid TD4 was completed. includes mileage, housing, meal allowance.

    BBC says: Not 100% clear, but I would argue deductible since benefits and allowances to incorporated employee are allowable

    -WCB premiums and liability insurance

    BBC says: not allowable

    (2) Does the phrase "tax years beginning after Oct 31, 2011" include for example a corporation with a tax year running from Sep 1, 2011 to Aug 31, 2012? Meaning that all of the income in the tax year ending Aug 31, 2012 continues to qualify for the general rate reduction if denied SBD?

    BBC says: it means the year has to start after Oct 31, 2011, so the new rules would apply to your Aug 31, 2013 year end. For your Aug 31, 2012 y/e, you would not be subject to the general rate reduction.

    ReplyDelete
    Replies
    1. Thank you Blunt, you'll be pleased to know you are the only person I've been polite to all day.

      With respect to wages for polite spouse: if spouse is shareholder/director and also actually performs real bookkeeping, tax prep and corporate records maintenance duties, and has dutifully recorded all such time spent, does that make the spouse an incorporated employee and therefore reasonable wages are deductible?

      Delete
    2. My concern is that if I T4 myself on these wages, and at some future date the corp is deemed PSB, the wages could be treated as shareholder appropriations and therefore non-deductible to corp but taxable to me? Therefore double taxed.

      Delete
  5. Anon:

    Great question whether a spouse shareholder who is paid a salary for corporate duties is an incorporated employee.

    I have never had to deal with this question and thus, I only provide guidance, you need to confirm with your accountant.

    In reading the Income Tax Act(125(7)),it would appear your spouse would probably not be considered an "incorporated employee" since s/he does not perform services on behalf of the corporation. Note, although s/he performs services for the corporation, s/he does not perform services on behalf of the corporation to the client/employer.

    In respect to T4 wages being double taxed, there is a specific exclusion for wages paid to an incorporated shareholder, so that should not be a concern.

    ReplyDelete
  6. The Government sent me a questionnaire, which was filled then they coined me to be an 'incorporated employee'. Regardless of the contract and the documentation my lawyer has provided, this has mostly been ignored and they appear to be pushing the this through.
    Meanwhile there are several other consultants out there including several in my work area that are in the same situation but continue to be allowed full deductions and benefits. It would seem that the government has to close this grey area and apply the rules to either everyone or no one. Picking one small company at a time, that cannot afford to defend themselves leagally [or it would not be viable to attempt to do so] in itself seems unjust.
    A question I have is: My company pays me personally in both dividends and salary. The dividends portion is taxed as ineligible dividends for a CCPC corporation. If it is determined that my company is acting as a PSB, since the full corporate tax rate is applied for the year in question, would it be true that dividends should now be treated as eligible for that tax year ? (otherwise double taxation would occur).
    The implication of double taxation would be serious where we are talking about over 10k in dividends per year in my case -- where CRA has gone back a few years, long after the dividends have been declared, to re-assess.
    so basically, would eligible dividends apply in the case of a PSB ?

    ReplyDelete
  7. Anon, sorry to hear you are potentially being re-assessed. You ask a great question. The dividends would qualify as GRIP (the account for eligible dividends). However, the issue, for which I have not had any actual experience is whether the CRA would allow you to change the ineligible dividend to an eligible dividend in the year you actually paid the dividend(my guess is it could be problematic, since to pay an eligible dividend certain documentation must be put in place at the time). So my concern is yes you will have GRIP, but that GRIP may only be used going forward. This would make the issue more painfull as the benefit of eligible dividends vs ineligible dividends was 10% in 2009, 7% in 2010, 5% in 2011 and is now only 4% in 2012. Sorry, cannot provide definitive answer, only the concern I have.

    ReplyDelete
  8. They re-asessed for 2007 and 2008, and I now assume they will apply the ruling for additional years going forward once a decision is made (2009 thru 2011). At this point I am reluctant to contact CRA regarding the Dividends as the file is currently in the Objection stage (Since late 2010).
    My Lawyer informed me they had delayed a decision on the file as they were looking at pooling a number of these together to decide how to handle. The outcome should be interesting - I can only assume a large number of IT consultants may be impacted, if not this year, then in the upcoming years.
    Thank you for your Reply.

    ReplyDelete
  9. The Cra won't allow a retroactive eligible dividend designation as per several of their technical interpretations.

    ReplyDelete
  10. from: Original Anonymous (Feb 17)

    in reply to: The CRA won't allow a retroactive eligible dividend designation as per several of their technical interpretations.
    Although it is very likely true with regards to someone
    intentionally attempting to change the designation,
    in this situation, as a result of an audit - a number
    of things have changed. Since the tax rate is increased
    and CCPC for small business disallowed for the tax
    year in question, as with all other adjustments, the
    eligible dividend may also be considered -- otherwise
    double taxation would occur.

    ReplyDelete
  11. Is Individual Pension Plan, IPP, contribution deductible under the new PSB rules?

    ReplyDelete
    Replies
    1. Anon, great question, fortunately for my clients, I never had to look into the issue. The new rules would not affect whether a IPP is deductible or not. If is was under the old rules, it will be under the new rules.

      Send me a private email to bluntbeancounter@gmail.com and i can point you in the right direction.

      Delete
    2. IPP contributions are one of the few eligible deductions that a PSB can still claim.

      Delete
  12. Can anyone answer this simple question ?
    I'm an IT Contractor incorporated and working for the fed through a head hunter. Is my corporation going to be treated as a PSB ?
    You say the max PSB tax rate could reach 58% which means I will really have no savings after paying bills. This is really scary situation. Is this legislation already in effect?

    ReplyDelete
    Replies
    1. Who is anyone? I only know of one person writing this blog. If you read the blog post link about the taxman cracking down on IT consultants, it clearly states

      "the CRA ..are reassessing these (individuals) – mainly IT consultants – who have created corporations (and) are providing their services, generally, through a staffing agency to federal government departments,”

      So you have possible risk and your corporation could be treated as a PSB. However, if you are paying mostly salary to yourself, your risk is minimial even if assessed.

      I have not had a chance to look if proposed legislation has been passed, but since majority government, it will if not already, so plan on it.

      Delete
  13. Hi Mark!

    Thanks so much for this info! I have another question: let's assume I don't want to take the risk and will work as an IT consultant and say that "yes, I am a PSB". I won't do any deductions whatsoever but in order to not be double-taxed I will pay myself all the corporate income as a salary. I'll leave almost no money in the corporation. So that should work, but consider this:
    - in 2012 my corporation earns $70K and I pay it all to myself.
    - in 2013 my corporation earns $100K and I pay it all to myself.
    - in 2014 I couldn't find good contract and my corporation only earned $40K, so I paid it all to myself.

    In these cases can CRA say - "hey, you can't do that, we'll punish you" because obviously you are paying yourself all the money from corporation each year as a salary, and that salary is different every time, and you NOT leaving anything in the corporation. Would that cause any trouble for me?

    Thanks!

    ReplyDelete
    Replies
    1. If you are paying out all your corporate income out each year as salary to yourself, you will have no issues even if the income is choppy.

      Delete
    2. Great, thanks Mark!

      I also have an interesting observation. As I am now getting into contracting I am talking to many consulting(staffing) agencies that hire for these IT Contract position. Whenever I bring up the question of PSB with them they basically say "we have hundreds of consultants and they are all incorporated and noone was ever audited for any PSB stuff". I think that in general not many consultants or agencies out there know about the whole PSB thing, especially the changes that happened in October 2011.

      Delete
    3. Since being deemed a PSB is not much of an issue according to staffing agencies, then you should ask them to idemnify you in case you are reassessed. See if their answer changes

      Delete
    4. Haha :)

      Yeah, I've seen two answers. Some say - "please be sure to speak to your financial advisor". Others say, "chances of you being audited are pretty slim". Obviously when one signs papers the agency will make sure they've covered themeselves up.

      But the bigger problem is that 99% of people don't know about this, and unknowingly take the chances. All in all, considering how many IT consultants is out there and how many CRA audits every year - they audit a tiny fraction. Had people known about it, they'd refuse to work as Incorporated or ask for higher hourly rates so that the extra expense of being PSB would be covered.

      I appreciate your information.

      BTW, Mark, can I ask one more question: would PSB rules apply to a non-incorporated Sole Proprietors, the kinds that are called "Self Imployed working through placement agency", they also get Code 11 on their T4 slip.
      Would PSB rules apply to them? If not, can they make reasonable deductions?

      Thanks again!

      Delete
    5. Last question I will answer on PSB's.

      The PSB rules do not apply to a non-incorporated "Self Employed working through placement agency", who get Code 11 on their T4 slip.

      I do not have any employment agencies as clients so I am not sure if the CRA has gone after them to try and make the self-employed consultants employees of the placement agency ( I know they must pay CPP and EI)or alternatively employees of the firm they are placed at and working full-time.

      You can deduct expenses related to your self-employment, the risk however is whether the CRA deems you an employee rather than a contractor and as usual that is a ? of facts.

      Delete
  14. Why CRA hate PSB so much to punish them? Those contractors sacrificed benefit package and vacation for the little tax saving advantage. It's all hard earned bloody money.

    ReplyDelete
    Replies
    1. It appears we either have an option to charge higher hourly rates or to switch to full time. Either way the clients (government, insurance cmpanies, banks and so on) will have to pay more if they want experienced people on their projects. The difference will go to the tax man.

      Delete
  15. I have a quick one. I am an Engineering consultant. I have one main contract (40hrs/week) which is paid through an agency. I am in the clients office, and they provide the equipment.

    I also do work for 3 other companies (about 1000hrs/year), on the weekends and evenings from home on my own PC. I am the sole shareholder of my company (ltd.)

    I pay myself and my wife(secretary) a salary as well as dividends.

    Am I at risk of being classified a PSB? would it help me if I pulled a "permit to practice" for my company?

    ReplyDelete
    Replies
    1. Anon, not quick nor a simple question.

      The fact that you have 4 clients in total and spend a 1,000 hours on the three other clients at least gives you a filing position that you are not a PSB or a position that only part of your business is a PSB. How the CRA views your situation, I cannot say with any certainty.

      I have no experience on whether or how the CRA would assess and apportion if they consider only a part of a corporation a PSB. Speak to your accountant, or if you dont have one, engage one.

      Delete
    2. Hi, I've had clients whose relationship with one particular customer is definitely different from the others, and in that case, I've apportioned the expenses in a separate class for each customer, allocating as appropriate, and calculating the amount to add back to income based on that pro-rata sharing of expenses. It's a pain to do this, and on top of that, WCB in BC won't insure that portion of the work, as the customer is liable when it's a corporate employee situation. In one case I was able to get a refund of WCB premiums paid for several years back for that portion of the earnings and they went after the Municipality for the WCB premiums on their 'corporate employee' instead.

      Delete
  16. Hi Mark

    this legislation sounds very similar to the IR35 legislation introduced in the UK about a decade ago. It particularly penalised small single person IT companies.

    In the UK this has led to the rise of so called "Umbrella" coroprations that can have thousands of contractors working as pseudo employees.

    Do you know if such a concept would work in Canada? And if so are there any already in existence? And if not, are you interested in establishing a business of this type? (Given you seem to be pretty informed about the legislation).

    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon,

      Was not awarwe of UK experience. I like the concept, however, unless the CRA condoned it, would be a waste of time and energy

      The contractor/PSB issue is very complex. Many people are inadvertently affected, however, on the other hand, most employees do not get to claim deductions or income split. So where is the line drawn between true contractor and employee; it is a fine line sometimes and that is why the CRA goes after unsuspecting contractors whether fair or not.

      Delete
  17. Regarding the PSB issue -- (these are just remarks where comments you may have on things you have heard is appreciated)
    I am a contractor in Ottawa and noticed a number of positions for contractors at the CRA, all of which are full time (where they are 35 to 40 hours per week). I have applied for a number of these contracts in the past, including a few at CRA where I had worked two. How is it that CRA would consider a contractor a de facto employee of the organization in wich someone is working (i.e. the CRA itself in this case) when the government has in place very strict guidelines for consultants ? With several hundred consultants at Revenue Canada, would they not place themselves in a situation where they have pseudo employees vs. contractors. This is interesting, no ? It is almost like one hand is not talking the other. My experience has been, with the government, that only one contract can be held at one time since 99% of contracts are during regular business hours and full time, so having multiple clients seems next to impossible in my field for government contracts (the one client, being one of the PSB criteria). I have tried for multiple clients without success. Public works Canada would deny the application.

    Perhaps the PSB criteria is too broadly applied and they should consider exceptions for certain areas of expertise.
    For example, I am a mainframe programmer and therefore I have to use equipment at the client site for the reason the most people do not have a mainframe at home. Government security is an issue as well therefore I have to work on site -- these are also two criteria of a PSB, use of own equipment and work location. Several things are beyond my control and therefore I would almost certainly be considered a PSB. Then again, so would most all Government Contractors.
    (one client, on site, with use of government equiptment).
    All told, there are several thousand in the same position as myself.
    I have read somewhere that CRA wishes to crack down on employees that leave the government to return as consultants (discouraging people from doing so). It may or may not be the case but I agree, with more people retiring this would be a growing trend.
    Perhaps there is a way they can more easily target this more precisely, rather than disrupting the delicate balance between all existing consultants in Government working together with (actual) employees.

    ReplyDelete
    Replies
    1. Anon, you make so many great points,I should have given you a guest blog spot.

      As I live in TO, I dont really have any clients working for the CRA, but clearly the government must address the realities of todays workplace and the right and left hand should meet. I feel your frustration and that of many others who have written in on this topic.

      Delete
  18. My company pays me 50% dividends and 50% salary.
    If my company is ever designated to be a PSB, will the dividends effectively be subject to double taxation since the original dividend was considered that of a CCPC. For a PSB a CCPC does not apply for that tax year. In that case, should dividends not be adjusted from ineligible (CCPC) to eligible (PSB) as PSBs are now taxed at a full rate.
    How many tax years can CRA go back for re-assessments if my company is ever impacted by this ? Thanks in advance...

    ReplyDelete
    Replies
    1. Anon

      Say your corp earned $100,000 and you paid yourslef a salary of $50,000 (50% as per above) so your corporation has net income of $50,000. The issue is that the remaining $50,000 of net income afer salary will be taxed at the high corporate rate without the small business deduction for year ends started before Oct 31, 2011 and for year ends after, there will be no small business deduction and no general rate reduction.

      Thus, it is not the dividends (which cannot be adjusted-see discussion above)that are double taxed, but the corporate income. For example in Ontario the low corp. rate before Oct, 2011 was 15.5%, but if you were reassessed for a period before Oct, the corp rate would increase to 28.25% and if assessed for a year end starting after Oct 31, 2011 the corp rate will now be close to 39%.

      You geneally can be audited up to 3 years from the date the corporation was assessed.

      Delete
  19. Oh sorry, I meant to specifically focus on the eligible vs. ineligible dividends actually [as I understand the impacts regarding the tax changes for the amounts left in the company]. Something I haven't heard much about is:
    Given that a CCPC can only declare ineligible dividends - and the amounts are distributed to the shareholder. Should the dividend, which was previously declared (and was ineligible), now be converted to an eligible dividend [with a re-assessment scenario], if the company is found to be a PSB. This considering that the the corporation is now taxed at the full tax rate as a PSB [a rate similar to a large company].
    The overall tax rate on the corporate side is unchanged (whether the dividend is eligible or ineligible), but by declaring the dividend now as ELIGIBLE, the tax credit to the shareholder is significantly larger (to offset the higher tax rate). The eligible dividend would be grossed up by 145 percent, with the tax credit of 27.5 percent (instead of 125, with 16 percent tax credit). T5's would have to be re-issued I imagine, but the difference between eligible an ineligible could be huge to the shareholder [in this case me].
    Do you feel PSB dividends should be eligible ? Or is this something still unclear in the PSB world since I have heard litle about it. Thanks in advance... Anon

    ReplyDelete
    Replies
    1. Anon, someone posted on Feb 18th above that, "the Cra won't allow a retroactive eligible dividend designation as per several of their technical interpretations". I dont have the time to seach for them.

      Also, I have something in a file, but not sure who to attribute to, that says- if a CCPC paid an ineligible dividend but were subsequently reassesed as a PSB there would be no ability to designate dividends as eligible dividends retroactively from the general rate income pool.

      Thus, there does not appear to be any way to retroactively change dividends if you are reassessed.

      Delete
  20. Thank you for your comments. By far this will be one of the largest impacts to me personally when I draw funds from the company as the percentage dividends to salary ratio I arrange is very high. A corrective action I will start immediately is to increase salary and minimize dividends to offset any potential impact should a PSB reassessment occur (CRA is the winner....they automatically get more overall tax out of myself/corporation combined)...Anon

    ReplyDelete
  21. I've run across PSB's in several unique situations.

    One was a commission sales rep for a foreign company. He, under the guise of a corporation which was paid commission cheques, travelled across the country, selling their product line to novelty stores. His wife came with him for company on the road. He was paying her a cheque for spending money, and paying her meals and living / travel expenses out of the company. She didn't do any work for the corporation, well, she did pile up the paperwork into a pile for the year end.

    It was quite a shock when I shared the PSB rules with them. Not only weren't many of their expenses deductible, but there was very likely a benefit conferred for the personal use of corporate funds under S. 15 for the spending money, and meals, etc. It was either that or pay back the company for thousands... and this had been going on for 20 years.

    I couldn't handle the abuse and the attitude of entitlement so I didn't take them on as clients.

    ReplyDelete
  22. What is the impact of this issue to people who provide same contracting/consulting services to clients as sole proprietors through an agency?

    ReplyDelete
    Replies
    1. Anon, if you are self employed, the PSB rules do not apply. However, you then get into whether you are an employee of the placement agency or not see this CRA link. http://www.cra-arc.gc.ca/tx/hm/xplnd/stts/plcmnt-eng.html

      If you are not considered an employee but considerd self employed, you should not have any issues. However, if the CRA deems you to be employed by the agency, the deductions you claimed as a self employed person could be reduced or denied.

      I have not looked at the criteria for placement agencies in years, so all I can suggest is read the CRA link above to see whether you have any concern.

      Delete
    2. Ff you are a sole prop working for a company through an agency, lets say as an IT consultant, the agency will deduct CPP/EI at source as required by CRA T4001. However, the agency's contract specifically states that there is no employment relationship here... And according to the agency, this source deduction should not affect business expense deduction and other features of sole proprietorship.

      does this situation described above make you more likely, less likely (sure!) or same for chances of being audited by CRA to determine if you fit their criteria of employee vs self employment? If you are incorporated, the agency wouldnt deduct any CPP/EI so probably no red flag to the CRA there... Or is there even a red flag in this situation?

      Delete
    3. Anon, I cannot answer with any certainty. Typically these things are subject to the CRA's audit flavour of the year and if agencies are not that flavour, it is more of a random event.

      Delete
  23. I worked in the UK as an engineering "PSB" during the time that the UK IR35 legislation was enacted. A major outcome of IR35 was the establishment, by a group of effected contractors, of "The Professional Contractors Group" (http://www.pcg.org.uk/cms/index.php). This group became a powerful voice, lobbying on behalf of freelancers, that the government could not ignore. Although IR35 remained in effect, the PCG worked to develop clear guidelines on interpretation of IR35 and a set of template contracts that if implemented with a client contained clauses to demonstrate that a employer-employee relationship did not exist, e.g. demonstration of professional and commercial risk that employees do not face. I would hope that a similar group could/would be established in Canada.

    On a more personal note. I am now living and working in Canada as an contractor and have a single client. However, that client is a US Corporation and as such there is no way I could be an employee of that client. How would the CRA view this?

    I'm also curious to know if there is a mechanism for challenging any CRA judgement of being a PSB? Or is it straight to the courts?

    ReplyDelete
    Replies
    1. Ikrananka, thx for pointing out the UK experience.

      In regard to the 2nd issue, per this blog by the Serbinski Accounting Firm which specialize in Cdn and US cross-border tax, they say this in their blog:
      (http://www.serbinski.com/working-in-usa/contractors.shtml)"if you provide personal services in the United States or elsewhere outside Canada and are paid through your own corporation - you may not claim the small business deduction".

      If their interpretation is correct, you will lose most of the deferral benefit of a corporation whether it is a PSB or not.

      You would first file a notice of objection and see if the issue can be resolved at the appeals level, then it is pretty much off to court.

      Delete
    2. Thanks for your reply and the very useful link. I need to read it again a few times to try and fully understand it but my impression is that it doesn't apply to me. My client is a US Corporation, however I am based and conduct all of my work physically in Canada. The blog appears to be addressed to those who conduct their work while physically in the US but via a Canadian Corporation.

      I'll discuss this further with my accountant.

      BTW - thanks for your excellent blog.

      Delete
    3. HI ikrananka,

      I am being faced with a similar situation. All work will be based out of canada, but I will be providing engineering services for a US based corporation, who does not have a legal entity here in Canada.

      Delete
    4. needTax Help,

      if you provide your services in Canada, you may be eligible for the small biz deduction. Speak or engage an accountant to review your specific situation

      Delete
  24. Hi Mark,

    Will this rule affect so called "personal service income"?

    Thanks.

    ReplyDelete
    Replies
    1. No, these rules relate to corporations only. However, if you are self employed and only have one main client, there is a risk your client could be re-assessed and be deemed to be your employer. If that was the case, many if not most of your self employment deductions could be denied.

      Delete
    2. Thanks Mark,

      You mentioned: "However, if you are self employed and only have one main client", do you mean those unlimited companies?

      What if the incorporation has one main source of income from one employer,and have other minor income from other different sources, does the main source have a risk of being classified as "personal service income"? in this case what about the tax rate in this kind of income though?

      Delete
    3. Anon, I think you are confusing me with your terms. I thought when you said "personal service income" you were inferring self employment income. If you are self-employed (not incorporated) my discussion stands. However, if you are incorporated and have one main client, you could be subject to the rules I discus in my blog.

      Delete
    4. I see what you mean. Thanks for your time Mark.

      Delete
  25. I'm incorporate and provide productions services on a freelance basis to various television production companies. My company contracts with them directly (no agency) and I have several clients per year -- often they overlap. I also use my company to develop projects of my own, each of which incurs revenue and expenses related to the project.

    I use my own equipment at most contracts, and often I work from home. Am I at risk?

    ReplyDelete
    Replies
    1. LeAnne, I cannot and will not provide a definitive answer on a blog. However, based on your circumstances and the comments I made in the above post, you would appear to have limited risk.

      Delete
  26. Hello Mark,

    In May 2012, Minister of Revenue Québec revised there criteria to adapt them to the realities of today's IT businesses. Two jurisprudence cases where won, TAP consulting and Pragma service conseils. Every company that were deemed to be PSB got their cases reversed because of those new criteria. Now CRA acknowledge that ownership of the tools is a neutral factor, but they still want to go to court to clarify their criteria. Why Canadians should spend money when there are already new rules for IT businesses in another Province? IT consultants works the same way in Québec than anywhere else, I find it completely unfair for the rest of Canada and I hope that CRA will learn from Revenue Québec and revised their criteria to adapt them to the realities of today. If parliament would have listen to the recommendation of the standing committee on Finance on this issue (June 2010), this problem would have been solved by now. We are in this mess because of the lack of clarity on the outdated rules of PSB. I am pleased to say that my case got reversed but still fighting for justice.

    ReplyDelete
    Replies
    1. Anon, thanks for sharing Quebec's position and your experience. And good for you, to continue fighting the fight, after you won your case.

      Maybe the CRA will follow Quebec's lead.

      Delete
  27. I started a corporation in Calgary 2 years ago. I am a one man company so far as I am in the growing stages and hope to develop software solution. In the interim, I consult my services to multiple companies here in Calgary, most of which come from recruiting companies has they are the preferred vendors for oil and gas. I don't pay myself a salary and last year took a dividend payout of only 20k, as I am living off savings while I try and build my company.

    So will this rule apply to me you think, I do IT consulting.

    ReplyDelete
    Replies
    1. Hi Anon, I dont provide specific advice, since I maybe missing significant facts. However, where you have multiple clients,in general you will not be a PSB.

      Delete
  28. Hi Mark,

    I have read through the article and all the comments with great interest. Thank you for posting. I have one question I wanted to clarify.

    I am an incorporated IT contractor. Is CRA's expectation that I have multiple contracts going on at the same time? Or is it acceptable if I have multiple contracts per year (2-4) but they do not overlap?

    ReplyDelete
    Replies
    1. Hi Anon:

      It has been my experience that as long as there are multiple contracts, the CRA does not require overlap of the contracts.

      Delete
    2. I see... Thanks Mark!

      Delete
  29. Hello,

    I'm currently working as a contracting wellsite geologist in Alberta and am still a sole prop. The structure of the work is:

    Oil company -> holdings ltd. -> me consulting

    The holdings ltd. company will find contracts and he will hire me on a per well basis. I charge a day rate and supply the equipment required for working. Additionally, each job is invoices separately not on an hourly or bi-weekly type pay structure.

    I've talked to other geologists and other service providers that are in the same boat and all of them are incorporated. I feel I may be missing out on a opportunity to take advantage of being incorporated. One fellow mentioned he pays himself 25k a year in salary and 90k in dividends. This seemed like a bunch of bologne until he said he got assessed last year and nothing came of it.

    What are your thoughts?

    Thanks for your time.

    ReplyDelete
    Replies
    1. Hi Anon,

      I do not provide specific income tax planning on this blog. You are in a bit of a grey area and I would need more facts, but I can see where it may be possible for you to utilize a corporation. My suggestion, hire an accountant, have them summarize the risks based on the facts and then make the decision on whether to incorporate. Based on what you have provided, it is definitely worth spending a few bucks to investigate.

      Delete
  30. Hello, Blunt
    We are a general contracting company which uses sub-trades to do the work, mainly roofing and exteriors. A number of the crews that we work with do only work for us. They accrue their own expenses (fuel, supplies, equipment), but typically have fewer than five employees. We require them to warranty their work, so if there is an issue, they are on the hook to fix it or pay for it.

    Is there a possibility of them being hit with this?

    ReplyDelete
    Replies
    1. Hi Anon:

      The fact that they only work for you is not great, however, that is somewhat counteracted by the fact they pay their own expenses and warrany their own work. So is there a possibility yes, they could be reassessed. However, they would have an argument that they assume all the risk.So I cannot give you a definitive answer.

      Delete
  31. Let's say I have been incorporated for 3 yrs now and have claimed expenses such as car lease, home office, meals, etc. I am contemplating to talk to CRA and write up a VD. I am not sure this is such a good idea, but am really worry about getting penalized. What is your thoughts on this?

    Thanks

    ReplyDelete
    Replies
    1. Anon, I don't give specific tax planning advice on this blog, too many facts I am not aware of. Speak to your accountant, but my guess is they will probably tell you not a good idea, but they may tell you to change what u are doing moving forward.

      Delete
  32. Hi, have there been any new developments since this was first enacted? I have been an incorporated contractor for 10 plus years in IT in Calgary. Most of my deductions are salary to myself but I have some dividend and small office expenses which could be reassessed.

    I get the impression the gov't is cracking down on PSB's that are contracted to Federal gov't agencies, are they also reassessing PSB's taht contract to private business's?

    Thanks kindly for the information provided here.

    ReplyDelete
    Replies
    1. Hi Anon,

      I did a legislative update blog post on Oct 26th

      I have not seen a flurry of re-assessments against PSBs in private business. However, where I see a blatant case of a company being a PSB, I try and mitigate before if possible. That may include having the incorporated employee take all or more salary from the PSB or where possible, having the corp get multiple contracts. In very blatant cases I suggest the incorporated employee not use their corporation at all and become an employee of the company paying them.

      Delete
  33. If one is considered a PSB, and is still allowed to provide him/herself as an employee, with benefits and allowances, where can we read what is exactly the amount that is allowed, and for what type of benefits and allowances.
    Say if my company income was 100 000/year, can I provide myself a 80 000 allowance for holidays?

    ReplyDelete
    Replies
    1. Anon, I don't have the time to research what the CRA considers a benefit or allowance for these purposes. However, by benefits I think they mean the companies share of CPP etc. As for allowances, whether they would allow a car allowance, I have not looked into this, but I would think at lot smaller than $80k --ie: you cannot use this exception to get around the rules.

      Delete
  34. Hello Mark,
    I have read through your blog and this article and all the comments with great interest. Thank you for your patience and generous replies.
    I'm an incorporated IT consultant, in contract with the Fed Gov through Agent company, sometime more than one agent. I've been providing services to the same client for the past 6 years, and occasionally another short term client in parallel. I invoice the agent and the agent company pays my company. my company pays for my expenses. I live in Toronto and travel to Ottawa weekly for my contract. I have been audited last year for 2008/2009 tax years and the decision was that my corporation is a PSB. After showing contracts and explaining expenses, most of the expenses were allowed including travel, per diem, accommodation and legal costs. my wife is an employee of the business and I pay myself and wife salaries. after reassessment, I had to pay more tax due to PSB higher tax rate!
    I paid the tax and interest and then filed an objection stating my argument using IT-73R6 para 18 and 19. I just heard back today from CRA, I had forgotten everything since it’s been 10 month since I filed the objection. I asked him to call him back once I read through my papers and refresh about the subject. we spoke and he was told me that had some questions in mind, he said that he agrees with the argument and the references made to para 18 and 19, however he wants to clarify in particular about para 18 part "d", and his decision will be based on it.
    para 18 para (d) states that a corp is a PSB if it provides services and (d) the fee for the services is not received or receivable by the corporation from a corporation with which it was associated in the year.
    So if my corp is associated with the payer corp, then it’s not a PSB.
    The argument is about the word "associated", and about its definition, he pointed to a document IT-64R4 that defines the association. which under para 256(1)(a) means two corporations are associated with each other if one of them is controlled, directly or indirectly in any manner whatever, by the other.
    clearly my corp is not associated based on that definition.
    I have to call the agent back to demonstrate and demonstrate the relationship I have with the payer.
    my corp relationship is nothing special, it’s the same like every other contractor has when going through agencies to deliver service to client like government. I have a contract with term and rate.
    Is there a way that this relationship can come be treated as if our corps are associated?
    somebody pointed out that it all comes down to the "degrees of separation" ... if you're incorporated and your actual contract is with an HR company and not the "gov. client" directly then you'll be treated as a SMB even if you work for the same "gov. client" for 10 straight years. is that true?
    Sorry for the long post and thanks so much in advance!
    SK

    ReplyDelete
    Replies
    1. Hi Anon:

      Sorry to hear you were audited. I just am too swamped at work to spend much time reviewing your situation and I dont provide personal tax advice on this blog. You should really be consulting your accountant about this issue. Off the top of my head, you wont like my answer, I dont see much of an argument you are associated. Best of luck and you should really contact your accountant to review your situation.

      Delete
    2. Hello,

      I would like to help a little. I am part of a group that is fighting CRA on this issue in Ottawa. You can contact Mark Siegle our lawyer for more information or look at site:
      http://crabs2010.jadnet.ca
      for more information. If you were asked to fill a questionnaire at the beginning of the audit and you feel that you did not have a fair treatment because of it,or you do not have the information on what CRA have based their analyses to determine your company a PSB, you can contact the taxpayers ombudsman office to lodge a complaint, the office is monitoring the complaints on this issue. Please contact an expert to help you on this.

      Delete
  35. Hi Mark,

    Thanks for your helpful info on this post and related comments.

    Both my wife and myself are contractors working with engineering companies. My corporation received the income from two clients. One client is through agent and we signed the contract with another client other than throug agent(called direct contract). How do you consider my corporation's situation, PSB or CCPC?

    When I discussed the risk of PSB with the manager in agent's office, he said if I signed the contract with agent, there is no any risk to be considered as PSB. The reason is that the agent pays me and agent does not provide office to me. Is his understanding correct?

    I have been developing another small business like building commercial websites, but there has been no profit so far. Does this effort reduce the risk to be PSB?

    I am looking forward your comments.

    Big thanks in advance.

    ReplyDelete
    Replies
    1. Hi Anon,

      I think for the agent to say there is not any risk is irresponsible of them. The fact you don't have an office with the agent is only one small factor to consider. I cannot and will not provide an opinion on whether you are a PSB on a blog. However, the fact you have two clients and have started a business are all positive factors.

      Sorry, that is all I am willing to say.

      Delete
  36. Thanks for all of your comments Mark. They are very helpful.

    I would like to ask you that if there is an agent company between the client company and my company, who is considered as my client when I try to answer the questions to evaluate if I am a PSB.

    The agent company only collects timesheets and then makes payment to my company, and nothing else. Am I considered as not PSB then?

    If I work from home and decide on my hours to work, would I not considered a PSB?

    Thanks in advance for you help.

    DC

    ReplyDelete
    Replies
    1. Anon- go back to the blog and read the link to the Business Journal article by Peter Kovessy titled Taxman cracks down on IT consultants. I think you will get your answer in that article.

      Delete
  37. hi,
    I am a realtor.....can I pay my spouse lumpsum payment in the year for doing some lead generation and admisnistrative work for me without forming a corporation ?If she does form management coporation and invoice me will it be considered personal corportaion or would be able to take advantage of small business corporation?

    ReplyDelete
    Replies
    1. Anon,

      I would probably not form a corporation as it would be cost prohibitive. The questions you need to ask are:

      1. Did she actually perform the services and if so, what is a reasonable price to pay for those services.

      2. If you are employed, does your employer provide a T2200 that says you need to hire an assistant? If not, you cannot claim a deduction for her services.

      3. If you are self-employed, it is then a question of whether you pay her as an employee or contractor for actual services provided. I will not answer that question for you as it has its own complications.

      Delete
  38. My question is not so simple. I am a US citizen, having an US "S" Corp. and I worked, as an Incorporated US Company, for 8 months for a Canadian Staff Augmentation Company subcontracted to Bruce Power. I invoiced the Staff Aug. company weekly for hours worked, plus per diem (designated sum)and certain travel expenses back to the US on a monthly basis. The Staff Aug. company submitted my weekly invoices to Bruce who intern paid the Staff Aug. Company who paid me in US funds to my Company Account minus 15% Canadian withholding taxes. They also reported 13% in HST but I was paid the HST as my obligation to submit to the Canadian gov't at the end of the year (filing date). I received a 1099 from the Canadian Staff Aug. company for earnings paid to my Company for my services, I intern paid my salary out of my Company account, leaving the 13% HST in the account in anticipation of it being paid to the Canadian gov't. I worked in Canadian for less than 183 days and was not in Canada for more than 183 days. I also worked for 2 additional Companies during the tax period in the US in two separate US states not under my "S" Corporation. In addition, for 10 months of the year I had a rental property (home) income, whic also must be included in the filing process. I would like to know the filing process for fulfilling my tax obligations to Canada (both personal and Business, since I was a US Company doing business in Canada for less than 183 days, and how the Canadian tax obligations affect my US federal tax and state filings. I have had difficulty finding a tax firm in the US who is both reputable, having a confirmed and validated history, and willing to do my taxes for a reasonable fee, not in the multiple thousands of dollars.

    ReplyDelete
    Replies
    1. Anon, sorry, you are correct your question is not simple and would take far to much time to answer. You are also correct, cross border taxation is expensive. I would look for a border CPA firm, such as in Buffalo depending upon where you live that know both the US and CDn side or a Cdn firm that does US.

      Delete
  39. Hi There, I really need some help and advise, I found these questionnaires:
    Do you have few clients, or worse, one client? --- 2 per year

    If you have only one or two clients, do you carry on the duties at that client’s offices on a regular and continuous basis? -- Sometimes, sometimes I offer my services remotely

    Does your client provide an office and tools of the trade such as a computer? --- Mine and there's

    Do you have a business card in the name of your client? -- No

    Does the client pay you on a regular basis, without the submission of an invoice? -- No

    Is your name on the client phone directory? -- No

    Would you appear to be an officer or employee of the client to a third party? -- No

    Are you remunerated on an hourly fees basis irrespective of the time needed to accomplish the task? -- No

    Were you hired to perform ongoing services as opposed to completing specific projects? --- No (Specific Project)

    Are there expected hours of work that are to be put in each day? -- Yes / No (Project work needs to be completed)

    Must all services be performed by you (that is, would the client not allow you to provide a substitute or not allow you to subcontract your duties)? -- Project related specific Tasks - yes

    If supplies or equipment are needed to complete a task, are they provided by the client? -- Some yes and Some No

    Will the client absorb any risk should a project go over budget? --- No, I will loose hourly wages as the project needs to finished what budget allows ..

    Please help as I am an IT Consultant and I have been doing this since 2006.
    thanks

    ReplyDelete
    Replies
    1. Zeeshan, I don't provide specific tax planning advice on this blog. The contractor vs employee issue is always a question of facts and all I can tell you is you have several facts on your side if you were to be audited by the CRA, however, I cannot guarantee the CRA would not still try and assess you as an employee. If you don't have an accountant, you should engage one to help ensure you undertake everything in your power to reflect being a contractor,many of which you already are or have done.

      Delete
    2. Thanks Mark for quick reply, I did ask my accountant about this and she said that this is still in "Draft" state (can you please confirm that) also the contractor working for one client for more than 2 years are the ones should be worrying ...

      Thanks again

      Delete
    3. Zeeshan, I have not checked lately if passed,but does not matter, it is as good as passed and would plan on it. There are no actual set rules of one vs two employers etc, but someone working for only one client for a long period, has greater risk of being assessed as a PSB or being audited as potentially being a PSB.

      Delete
  40. Hi Mark,
    In relation to anon's question dated April 2, 2012 at 4:20 PM where s/he wanted to declare outright that s/he is PSB, you commented that it is fine with flowing all corporate income to yourself as salary. I don't want to have to go remit deductions every so often to CRA or file the related forms, so can I bypass this by flowing all the income to myself as contract pay (not construction work), and then pay the relevant CPP and income taxes on my personal return? Is this not possible, do I have to file more forms, and/or are there clear disadvantages with this approach?
    Thank you

    ReplyDelete
    Replies
    1. Not recommended, do it properly and speak to your accounatant. I am not answering questions in April so thats all you get. Thx

      Delete
  41. Hello Mark,

    I would like to inform you that the ombudsman of taxpayers office started a systemic investigation on the use of questionnaires for the determination status of a worker following several complaints. The investigation started in January 2013 and will take from 18 to 24 months for its conclusion.

    ReplyDelete
  42. Hello Mark,

    I have an issue for your evaluation. I have an incorporated company which deals with consulting and day home services. I perform work for an oil and gas company as designer and issue invoices for my services but performs my work in their building, uses their own computer and my contract stipulates that I cannot perform other contract with other company to avoid conflict of interest. My wife accepts day home services and uses the company invoice. I have five full time employees in my company which occupies different positions including day home providers. I am considered a small business or personal service business? Thank you very much and more power to you.....

    ReplyDelete
  43. Hi Gina

    Sorry, but your question is way too complicated to answer on a blog and even if I wanted to answer it, I probably would have a hard time providing a definitive answer based on the various complex factors your corp has.

    You need to deal with your corporations accountant who knows your business

    ReplyDelete
  44. Hi Mark,

    Can you please help me.

    When I go to the CRA website they list these six criteria in IT 73R6 to determine personal services business. The problem is twofold, one the IT is somewhat old (2002) and second indicates that the list is not exhaustive.

    The questions then are is the list in IT73R6 still applicable given the tax law changes and any subsequent court decisions, and is the not exhaustive list (para 18 and 19 of the IT) missing any factors you would consider critical in making your decision about whether a corporation is a personal service business or not and if so what are those factors.

    Thank you for your help.

    ReplyDelete
  45. Anon,

    The list is still pretty much what the CRA uses.

    ReplyDelete
  46. Hi Mark,

    I've read about many situations of an incorporated contractor of a personnel company being declared a PSB but haven't heard about the implication to the personnel company. Does CRA go after the personnel company for their share of the CPP/EI? Does CRA go after them for anything else? This all seems one sided.

    Thanks.

    ReplyDelete
    Replies
    1. Hi Anon:

      In the last while I have only seen situations where a a self-employed contractor (as oppossed to a PSB)is considered an employee by the CRA. In those cases, they have assessed the employer company their share of the CPP, EI and penalties. Also, sometimes the employer is then hit for EHT and WSIB. These assessments can be huge.

      Delete
  47. I realize this post is fairly old, but I was hoping you still may be able to provide me with a little insight.
    My husband just bought into the company he works for. They have told him that he needs to set up a corporation to buy the shares and that any work he does for the company now gets invoiced from his corporation and that he is no longer deemed as an employee but an owner instead. He still works a lot of hours at the company but has full control over what he does. We can not find any info online about this particular situation in relation to PSBs and we are have a 2 week wait to get in to see the accountant and tax lawyer. Hoping maybe you could give a little information in the meantime as this is all happening really fast. Thank you.

    ReplyDelete
    Replies
    1. Hi Confused:

      I dont provide personal tax planning advice on this blog, so I will just provide some general comments below. I am glad you are going to see a lawyer and accountant.

      In general and depending upon the specific fact situation, it usually makes sense to use the corporation to purchase the shares.

      However, again in general, subject to the facts, I do not usually like the idea of the corp invoicing for your husbands services. I would discuss this concern with your advisors and whether they would prefer your husband to be paid as an employee by his current company and to only receive dividends paid from the current company to his new corporation.

      Delete
  48. Does it make a difference if I export services to the USA, whether I'm considered a PSB by CRA? I work mostly in Ottawa, Ontario, for a single client in Massachusetts. I understand the rest of the CRA checklist, but haven't seen any advice on this.

    ReplyDelete
    Replies
    1. Hi Brad:

      I have never had to deal with this situation. My guess is the CRA would apply the same test to the US employer as they would a Cdn employer, that is, would you be regarded as an employee of the US corp if not for your Cdn corp.

      Check out this article for issues that arise when doing work for a US company

      http://www.serbinski.com/working-in-usa/contractors.shtml

      Delete
    2. I don't understand how that could possibly apply. In order to legally work as an employee of an american corporation you need to have a US Work Visa. Since there is no work visa, the argument simply is, there is no way I can be an employee XZY America Corp. because I do not have a work visa and I am not legally eligible to work in the US as an employee. Therefore, I am also not working illegally in the USA as I am not in the USA. The article in question refers to providing personal services in which you would not be, as you would clearly be in a vender client situation. A corporate entity providing service to a company in foreign country whereas all the work is done from your own country in your own corporation's office and with your own equipment. Regardless if you have only a single or multiple clients.

      It would certainly be illegal for you to even be on the payroll of a US company without a US work permit - this means potential jail time for you or huge fines for the US companies. So, I would suggest that first the US company would have to have a US court ruling that you were an employee of the US corporation before the CRA could even consider that you were. The US court would have to rule that although you were not on the payroll, you should have been on the payroll. This would mean the company hired you illegally and would therefore be charged.

      Unless there are any case law or precedences about this, I wouldn't be worried in your situation.

      Delete
  49. Hello,

    So if someone works basically 9-5 for a single client, is paid hourly as a contractor, is the only person in his corporation, uses the companies equipment, they dictate the type of work, 90% of income comes from this single contract, are they going to be re-classified for the 2013 year?

    ReplyDelete
    Replies
    1. Hi Anon

      I cannot say definitively one way or the other. However, I would have concern you could be considered a PSB

      Delete
  50. Thanks for this great info Mark. You're time is much appreciated.
    After learning more about PSB's, the owners of the company I work for are very concerned about being reassessed as PSB's if audited. (Each has an incorporated company that invoices and is paid for services monthly, determines own hours, has a (weak) management agreement, has own benefit plan, but only works for the company they own and is paid a bonus based on a net income calculation. We feel there's a fair chance of being nailed on this.)
    Looking at the $$$ at risk mainly for 2012, we're talking hundreds of thousands. We're trying to decide whether to amend 2012 T2's, risk waiting things out, or rectification.
    We've consulted several tax lawyers and our accountants for guidance, but can't seem to make a decision.
    In your experience, does an amendment usually trigger an audit?
    Do you know of any PSB cases we can refer to?
    Thanks again.
    Karmel

    ReplyDelete
    Replies
    1. Hi Karmel:

      Not sure from your summary if the owners are owner managers and these cases apply, but if so, a couple recent owner manager cases are Pluri Vox Media Corp vs Queen and Butt vs MNR

      I dont provide specific advice on this blog, but if I was the accountant and the facts are essentially as you tel them, I know immediately how I would answer.

      Delete
  51. Would appreciate your insight, as you seem very knowledgeable on this subject. I am a CPA/CGA and have a corporate tax client that reported as a PSB in 2012. He was doing business with his brother's corp only, was the only employee and using employer's equipment. He started contracting with an arm's length party in March, 2013 and is pursuing other arm's length contracts. Does this seem enough to report as a CCPC for 2013? Would the SBD be pro-rated (July 31 year end)? Would appreciate your thoughts.

    ReplyDelete
    Replies
    1. Hi Anon

      Wow, your client is probably one of very few people who report as a PSB; there are many who are PSB's, but very few who report that way.

      Your question is interesting. Unfortunately I do not provide specific tax planning advice on this blog and even if I did, I would require more facts as to the quantum of the income for each client. What I will say is that you may be able to build a position dependent upon the facts that not all the income is PSB income.

      Delete
  52. Hi Anon,
    Interest in your comments on the following suggestion. I am a CGA and have a few clients that pose a higher risk of a PSB assessment, yet have the adequate documentation to support an active corp. Along with avoiding dividends, I am considering it may be beneficial to claim expenses such as auto by the employee\shareholder as employment expenses on the T777. Of course, the T2200 is signed by same. This would reduce the amount disallowed as expenses for a PSB, if reassessed. Have you had any experience with this, and if T777 expenses would also be denied along side a reassessment. Thanks in advance.

    ReplyDelete
    Replies
    1. Hi Anon

      Great question. I was discussing the exact same issue with my tax manager a few days ago for a client we have some concern over. We were thinking of doing the same thing.However, we were unsure whether the CRA (1) would disallow the T777 claims or in the alternative (2) if we did nothing, would they allow amended T777 claims as an employee. I cannot answer since to date I have been lucky enough to escape a couple PSB audits without re-assessment.

      Delete
    2. I'm an accountant, and I would sure love to hear the answer to this. It appears that this is the direction many accountants are going with clients that are marginally PSB's in appearance. Full wage to shareholder and T2200 to set up allowed employment expenses on the personal tax side. I was just at a Devaney tax update, and they were unsure of this as well...I guess we will see...

      Delete
    3. Hey Anon:

      That is the conservative approach (definitely not the best for tax) and hopefully the CRA allows the T2200 expenses and does not trace the expenses to the PSB and deny them.

      Delete
    4. I think it would be considered not within the "spirit" of the ITA to do full wage and flow through all expenses to a T777, presenting a clear corporate PSB position (and hence denial of any expenses no matter how submitted). If not reporting as a PSB, then the info has to support that, with normal business expenses being claimed. The T777 should only claim for what any reasonable employee in the industry may claim, such as auto, etc. An employee would not be required to pay all the operating expenses. If the corp is deemed a PSB, then I can see a better chance of these emp.expenses being allowed based on what other "employees" from the paying corporation may be allowed on a T777 claim as well. At best then it will simply reduce the client's reassessment and penalties, while avoiding gross negligence penalties for yourself.

      Delete
  53. I live in Ontario and have a Ontario corporation under which I have been contract programmer. Can I pursue work with in-Canada, out-of-province companies? I have tele-worked for companies like this in Ontario.

    ReplyDelete
    Replies
    1. Hi Anon

      Yes, just because you incorporated in Ont that does not restrict where you can earn income. You can earn income in any province or country, however, you may have some additional tax reporting to do.

      Delete
  54. What about HST? I am an IT contractor (incorporated) and any income I earn I am providing Govt 13% in the form of HST collected. If they deem me as employee (PSB), how it is fair that they still want 13% HST collected and paid to them? as regular employees do not charge HST on their salary. With us being consultant govt is already getting 13% on whatever we make... totally unfair

    ReplyDelete
    Replies
    1. HI Anon

      Who ever said income tax is fair. The truly unfair part is many people are forced by their contractual agreements to incorporate to get the work and then are considered PSBs.

      Delete
  55. If I am incorporated but my on-going contract is with a company in the Caribbean - that I only travel to once a year for a couple weeks doing the vast majority of my work remotely throughout the year - does that make a difference in PSB determination?

    ReplyDelete
    Replies
    1. HI Anon

      From a PSB perspective, you will still have the same PSB risk, depending upon the facts.

      You appear to be carrying on your business in Cda, but if it was determined you are not carrying on your business in Cda, that could be detrimental in other ways. Speak to your accountant about both these issues.

      Delete
  56. How does HST work with PSB? If I am a PSB can I still keep some of the HST through quick method and add it to my income? Or do I loose that too and must remit all 13% to CRA?
    Thanks for your time in answering my questions, much appreciated

    ReplyDelete
    Replies
    1. Hi Anon

      I never had to consider this issue. My guess is the HST you remit would not be affected by the PSB issue, but again, I have never looked at this issue.

      Delete
  57. I am thinking to file outright as PSB. If I pay all the incorporated income to myself as salary question is do I still pay both sides of CPP (employee portion as well as employer portion) or do I only pay employee part of CPP?

    ReplyDelete
    Replies
    1. Hi Anon

      My understanding is you still pay the corporations share

      Delete
  58. Hello,

    Please help me with the situation below:

    1. I incorporated a company for my transportation business. I do not have a truck but I work for a company who writes the cheque under the name of my corporation. I always deposit the cheque in my corporate account and take it out personally. I am not an employee of my corporation and never paid DAS.

    2. My accountant has filed the whole money I took out in my personal taxes.

    3. My question is: what do I do with my corporate taxes now? Will I be double taxes? Do I even have to file corporate taxes since I declared income on personal side? or can i show same revenue and management fees as expense and file corporate taxes?

    PLEASE HELP!!!

    ReplyDelete
    Replies
    1. Hi Anon:

      You should not have to pay double tax, but you need to get your affairs sorted out.

      Firstly, if you are paid to a corporation, you must report your income in the corporation and file your corporate tax return. You will have some kind of expense to offset the revenue such that you probably should have no tax, however, that is your accountants issue to sort out as to what type of expense it is. If it is a wage you could have penalties in the corp for not making tax withholding's, if it is a management fee, you may have HST issues. See your accountant to sort it out or get a new one if they cannot help you.

      Delete
  59. Hello,

    I am using my corporation for two business. For the most part, I work as a consultant for three firms. I would split my time into like 70% (uses equipment & software provided by that company), 20% & 10% (use my own equipment & software, usually work from home). If I am really busy, I'll hire someone to help me with my consulting work.

    Starting this year, I am importing goods to sell online, my company has an import number. Majority of my income would come from my consulting business.

    How would CRA defines me?

    Regards,

    ReplyDelete
  60. Hi Anon

    Sorry, I don't provide tax opinions on this blog, especially without all the facts. The fact you do consulting for 3 diff. firms would definitely be in your favour.

    ReplyDelete
  61. I am an insurance adviser and newly incorporated( as abc financial services). I sell insurance to many clients and have licensed to sell with many life insurance companies. I am considered PSB. Thank in advance for your reply.

    ReplyDelete
    Replies
    1. Hi Anon

      I don't provide personal tax planning on this blog. However, in general, your risk is related to polices sold and commissions sold and earned and the insurance companies treat those earnings as self employed commissions. Thus, in general being a PSB is not an issue for your industry, but speak to your accountant.

      Delete
  62. can you tell me if the psb rules generally apply to incorporated real estate agents , and further if the rules change if I own a small portion of the brokerage firm 9%.

    ReplyDelete
    Replies
    1. Hi Anon

      As you are a shareholder in a company, it is best to ask your companies accountant, as he/she is aware of all the facts relating to your activities and ownership.

      Delete
  63. Hi Blunt,

    I recently became incorporated in October of this year and have been having some issues with my corporate account payments (delayed until Dec 31st).

    I am planning to pay myself 100% of the corporate income as salary but have been unable to deposit it into my personal account by calendar year end. Will I still be able to deduct this salary from my corporation's 2014 earnings or will this amount be treated as profit for this year?

    ReplyDelete
    Replies
    1. Hi Anon

      The employee tax deductions on a Dec salary would not be due until Jan 15, 2015 (subject to your remittance period). Thus, depending on the circumstances, you may still be able to deduct your 2014 wage earnings, however, i would speak to your accountant to ensure you deal with this properly

      Delete
  64. Hi there, thank you for the great blog. It is extremely informative! I was wondering if you could possibly shed some light into my situation. I incorporated in December 2013, and my first year-end was in November 2014. Throughout my fiscal year, I have been taking draws out of my corporation. However, having read this blog, and several others, I know that I will be taxed as a PSB, and therefore it would be more advantageous to take out salary vs. dividends. Obviously, I am late for my monthly remittances. Therefore, would it make sense to declare a bonus in the amount of my total draws, on November 2014? Then, I would pay the source deductions, and call this a part of my personal income for the 2014 tax year.

    ReplyDelete
    Replies
    1. HI Anon:

      I do not provide personal tax planning on this blog. That being said, conceptually your plan could have merit depending upon your fact situation, however, you would have had to have made your November bonus remittance by Dec 15th.

      I would suggest you speak to your accountant or get one to (1)determine your PSB risk (2) deal with your concern should they consider you a PSB

      Delete
  65. The CRA has published guidelines for whether IT consultants are employees or self employed workers. See http://www.cra-arc.gc.ca/tx/hm/xplnd/itc-eng.html for more details. I used this when negotiating with the Department of Justice on my Appeal of a PSB ruling by the CRA. They conceded on the PSB issue and settled.

    ReplyDelete
    Replies
    1. Thx. The CRA's guidelines are quite useful to avoid an issue with them, but they are the CRA's interpretation and not necessarily law.

      Delete
  66. Hi Mark,

    Can you speak to the factors relevant for health care professionals such as physio and massage therapists that work as contractors at health clinics? If you're not familiar, many practitioners working in these situations are often on fixed-term contracts and the revenue is shared between both parties on a percentage basis (majority of which goes to the practitioner). The practitioner is often responsible for delivering the treatment and fulfilling requirements of the regulators (such as record keeping) only. Everything else regarding the operation of the business (reception, equipment, facilities and other overhead) falls in the clinic's hands. Contracts will almost always have non-compete clauses where should the practitioner leave the clinic for any reason, they can't actively take their clients with them since they 'belong' to the clinic. To me this implies that the practitioner is working for the clinic and would be an employee-employer relationship if the corporation did not exist. However, in reality, when a practitioner leaves, many client's will of their own free will, often follow them to their next clinic. In this situation, I would interpret the clinic as an overhead management service which is a business expense for the practitioner.

    Finally, is the determination of whether a corporation is personal services business a binary result? If a corporation has a portion of it's revenue that is deemed to be active business income and a portion that is not (because it is from a personal services business) will the amoun of income eligible for favourable tax treatment reflect the split or is it an all or nothing affair?

    Thanks

    Kyle

    ReplyDelete
    Replies
    1. Hi Kyle:

      Sorry, but this will be a fairly useless answer. Firstly, I have not had to address this issue and would only comment if I had first hand experience. Secondly, I am not sure about your second question, as my experience with the issue has always resulted in total denial or full allowance and I have not seen a partial claim allowed. So I am not sure whether they CRA would every partition a claim.

      Delete
  67. Hello Mark,

    Thanks for this excellent piece. I am incorporated business with a single person right providing management consulting services and business professional services (non IT). Is this considered a PSB ? In such a case, would it be better to pay myself a salary and what other suggestions you have.

    ReplyDelete
    Replies
    1. Hi Jangotrick,

      I cannot answer that, there are multiple factors to be considered. If you are a PSB, subject to the facts, paying a salary and maybe if it makes sense an IPP or PPP are pretty much the main deductions.

      Delete
  68. A lot of the replies on here are quite biased towards someone being a PSB whereas most case law that I have seen and reviewed has had PSB assessments from the CRA overturned by the court of appeals, or in some cases the supreme court which indicates the law is on side of the contractor quite often regardless of what the CRA has planned for you.

    Thoughts?

    See: canadian tax journal / revue fiscale canadienne (2014) 62:4, 927 - 70 - for reference.

    ReplyDelete
  69. Hi Anon

    I read that a while ago and don't have the time to re-read it. However, the point is that most clients do not want to fight the CRA in court and spend the fees and thus, they generally rather error on the side of caution, even if less tax advantageous. Not a great answer, but a practical one, since the CRA does reassess for PSB's whether they will win in court or not

    ReplyDelete
  70. Hello Mark,

    My corp has a contract with a major bank. The only deduction in the corp is professional fees for the T2 preparation, bank fees and salary (no retained earnings ever). What are your thoughts on me then taking other employee deductions on my T1 with a T2200 that I issue to myself against the employment income from my corp. To dedcut things like home office supplies, research journals etc.

    Further i remit HST based on the quick method (percentage based on a project management business), which essential allows me ITCs even though technically i have no expenses that i can corporate deduct anyways. Do you see that a red flag for a HST audit.

    ReplyDelete
    Replies
    1. Hi Unknown

      It would be aggressive and could be challenged by the CRA, but I have seen it done.

      Re HST -Not sure, I dont really deal with anyone who uses quick method.

      Delete