Navigating the Complex World of Personal Services Businesses (PSBs) 0

Posted On January 25, 2024, by Admin

Running a business in Canada involves a myriad of financial intricacies, and one aspect that often perplexes entrepreneurs is understanding and mitigating the risks associated with Personal Services Businesses (PSBs). Let’s delve into what PSBs are, the general tax risks they entail, and the latest updates you need to be aware of.

What is a Personal Services Business (PSB)?

A PSB is a corporation of less than 5 employees that provides services to a single other company. In the context of a PSB, the individual performing the work within this corporation would be considered an employee of the payer if not for the existence of the corporation. Often referred to as an “incorporated employee,” this structure can trigger specific tax consequences and risks.

Tax Implications of Operating as a PSB

Operating as a PSB can have legal and financial consequences, including a higher tax burden. Here are some key tax implications to consider:

  • Tax Deductions and Rates: Unlike other corporations, a PSB does not qualify for the general tax rate reduction or the small business deduction. Therefore, it is subject to the full federal and provincial corporate tax rates on all taxable income, along with an additional 5% tax.
  • Limited Expense Deductions: PSBs are limited in the types of expenses they can deduct, which are outlined in the T2 Corporation Income Tax Guide. Deductions may include the salary and wages paid to incorporated employees, employment benefits provided to that employee, certain expenses associated with selling property or negotiating contracts, and legal expenses for collecting amounts owed. However, many other expenses are disallowed.
  • Filing and Payment Obligations: Although PSBs cannot claim the same tax deductions and expenses available to other corporations and are subject to a higher tax rate, they are still required to file a T2 Corporation Income Tax Return and pay any amounts owing to the CRA by the corporate tax filing deadlines.
  • GST/HST Obligations: PSBs also have GST/HST withholding, filing, and remitting obligations, along with payroll deductions such as CPP/EI and issuing T4 slips for employees.

The Latest Developments on PSBs

The CRA has recently intensified its scrutiny of PSBs, launching a campaign to ensure compliance with tax rules. The consequences of breaching these rules can be severe, including hefty tax liabilities and penalties.

The campaign specifically targets industries that frequently hire service providers who may operate as PSBs, such as trucking, IT consulting, accounting, construction, and catering.

In July 2022, the CRA announced its intention to contact Canadian businesses from June to December 2022, requesting documentation about their payer/payee relationships. While participation in this program is voluntary, businesses that choose to participate are advised to correct any errors and comply with the Income Tax Act.

Managing PSB Risk – Tips and Strategies

Given the potential tax liabilities associated with PSBs, it is crucial to take proactive steps to manage the risk. Here are some strategies to consider:

  • Salary Payments: To reduce the risk of PSB income, consider paying out corporate earnings as a salary to incorporated employees. This can help reduce the corporate income subject to the high PSB tax rate.
  • Clear Documentation: Clearly document your business relationships with well-drafted contracts that differentiate between a business relationship and an employer-employee relationship. Seek legal advice to ensure your contracts align with the CRA’s criteria.
  • Consider PSB Risk in Remuneration Planning: When deciding on remuneration levels, consider whether a salary or a dividend should be paid. Paying a salary can reduce the impact of a PSB reassessment.

Understanding the intricacies of Personal Services Businesses is essential for Canadian businesses, especially those in industries targeted by the CRA’s campaign. By staying informed, business owners can maximize their tax efficiency and compliance with GST/HST regulations. The world of PSBs may be complex, but with the right knowledge and strategies, you can navigate it successfully.

For further information on PSBs and to ensure compliance with CRA regulations, consult our team at GBA LLP. We provide expert guidance on tax planning, corporate structure, and compliance, helping businesses across Canada thrive in a complex financial landscape. Stay updated by joining us on LinkedIn for more insights, and explore our services at GBA-LLP.ca.

Join us at GBA LLP on LinkedIn for the upcoming segments of this series. Our dedication to guiding the entrepreneurial heart across Canada remains unparalleled. Dive deeper at GBA-LLP.ca.

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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.

GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns.  We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.

If you would like to schedule a call to discuss your accounting or tax needs with one of our team members, please complete the free no obligation meeting request on this page.

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