The Personal Services Business (“PSB”) is defined by the CRA as “a business that a corporation carried on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform. Instead, an individual performs the services on behalf of the corporation. That individual is called an incorporated employee.” It is an employee masquerading as a corporation.
The way I describe a PSB to somebody is as follows. Phil has an incorporation. It is called PhilCo. PhilCo is hired by a factory. PhilCo sends Phil every day to do work at the factory. Phil stands on the assembly line and does the same work as Mike (an employee) and Jimbo (an employee) and Chloé and Claire (also employees). In fact, Phil, Mike, Jimbo, Chloé and Claire all do the exact same job. They have done so for years. But Jimbo, Chloé and Claire all receive a pay cheque with the usual deductions, and Phil sends the factory an invoice once a month, plus he includes HST on top of the work done. As a business, PhilCo can write off expenses such as a phone, home office, vehicle, etc. Life is great for Phil.
CRA’s conclusion: Phil is an employee masquerading as a business PhilCo. PhilCo is a PSB. So: The income from PhilCo is not eligible for the Small Business Deduction and the deductions which are allowed in order to compute income of PhilCo are severely restricted.
It is almost as if PhilCo never existed in the first place. A lot of corporations ask their workers to become incorporated. This happens in trucking and IT industries and in many others. Workers should be careful to consider whether they are operating a Personal Services Business and should seek professional counsel.
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