Income Tax Act subsections 125(7) and 123.4(1)
A personal services business (PSB) is a corporation that carries on business through an individual, and that individual performs services while actually acting like an employee. This is occasionally known as the incorporated employee.
The Income Tax Act provides that a PSB is found where an individual who performs services on behalf of a corporation, or a person related to the incorporated employee, is a specified shareholder of the corporation, while providing services to another business, and the relationship could be seen as an employee/employer relationship.
If you would be considered an independent contractor and not an employee, then you would not be considered to be running a PSB.
In C.J. McCarty Inc. v. The Queen, the Tax Court ruled that a corporation which was providing project management services to a client was found to be providing those services as an independent contractor and was therefore not a PSB.
In 758997 Alberta Ltd. v. The Queen, the Tax Court found that a corporation which was providing services to a client through a placement agency was a PSB.
Income Tax Act Subsection 18(1)(p)
The above noted Income Tax Act subsection limits the types of expenses that a PSB may deduct from its income. The deductions are limited to the following:
- The salary, wages or other remuneration paid in the year to an incorporated employee of the corporation;
- The cost of any benefit or allowance provided to an incorporated employee;
- Any amount expended in connection with the selling of property or the negotiating of contracts by the corporation, as long as the amount would have been deductible if it had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount; and
- Legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered.
A PSB is not eligible for the small business deduction (insert article link), and pays tax at the full corporate rate.
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