Personal services business risk assessment

What a personal services business actually is

A personal services business — PSB — is not something you register. The Canada Revenue Agency applies the label afterwards, based on how the work is done, so a one-person corporation can be a PSB one year and not the next on the same contracts.

Section 125(7) of the Income Tax Act sets five conditions, all required: the corporation provides services; the worker or a relative is a specified shareholder (at least 10% of any class, directly or indirectly); it has five or fewer full-time employees; the payer is not associated; and, crucially, without the corporation the worker would reasonably be 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

The CRA tests that with its usual classification factors: control over how and when work is done, who supplies tools, the right to subcontract or hire help, the chance of profit or loss, and integration into the client’s organization. Common intent counts, but a contract calling you independent does not override a relationship that 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

Why check: PSB income loses the small business deduction and the general rate reduction, paying full federal and provincial corporate rates plus an additional 5% tax specific to PSB income.

Deductions shrink too, broadly to the incorporated employee’s pay and benefits and certain selling or contract-negotiation costs. Reassessments reach back over open years, so the cost is rarely one return.

How to use this result

It is a prompt, not a verdict. A higher result means your answers match what the CRA links to employment, warranting a review of your contracts and working reality, which nine questions cannot capture. A lower result means nothing obvious today, not protection if a contract changes.

If the assessment puts you in the middle or high band, the next step is a written review of your actual arrangement. See a personal services business risk review.

If you want the position looked at properly, send an enquiry and bring one of your client contracts.