Personal services business risk assessment

What a personal services business actually is

A personal services business — PSB — is not a type of company you register. It is a description the Canada Revenue Agency applies to a corporation after the fact, based on how the work is really carried out. A one-person corporation can be a PSB in one year and not the next, on the same contracts, if the working relationship changes.

The definition sits in section 125(7) of the Income Tax Act, and it has five conditions. All five must be met. The corporation provides services; the worker or someone related to them is a specified shareholder, meaning they own at least 10% of any class of shares directly or indirectly; the corporation employs five or fewer full-time employees through the year; the money came from a payer that is not an associated corporation; and — the one that matters — if the corporation did not exist, the worker would reasonably be considered an employee of the client.

Four of those five are matters of fact you can answer from your own records in about a minute. The fifth is a question of judgement, and it is the one that produces disagreement.

Why the fifth condition is the whole assessment

To decide whether someone would reasonably be considered an employee, the CRA applies the same factors it uses for any worker-classification question: who controls how and when the work is done; who supplies the tools and equipment; whether the worker can subcontract the work or hire helpers; whether the worker can make a profit or suffer a loss depending on how they run the job; and how far the worker is integrated into the client’s organisation. The parties’ common intent is weighed alongside those factors — but a contract describing you as an independent contractor does not settle the matter if the day-to-day relationship looks like employment.

No single factor decides it. A contractor who uses the client’s equipment because it is bolted to the client’s floor is not thereby an employee. The factors are read together, and the picture they make is what counts.

What is at stake if the answer is yes

The consequences are why this is worth checking rather than assuming. Income earned by a PSB is not eligible for the small business deduction, and not eligible for the general rate reduction — the two things that make the corporate rate on active business income low. It is taxed at the full federal and provincial corporate rates, and then an additional 5% tax applies on top, a tax that exists specifically for PSB income.

Deductions are restricted as well. Broadly, a PSB may deduct the incorporated employee’s salary, wages and benefits, and certain costs of selling property or negotiating contracts — not the general run of business expenses another corporation would claim. And because a reassessment reaches back over open years, the arithmetic is rarely about a single return.

How to use this result

Treat it as a prompt, not a verdict. A result in the higher band means the factors you selected are the ones the CRA associates with employment, and that the position is worth reviewing properly — with your actual contracts, and with how the work actually runs, which a nine-question tool cannot see. A result in the lower band means nothing obvious stands out today; it does not immunise a contract that changes next quarter.

If you want the position looked at properly, book a free consult and bring one of your client contracts.