We look out for you, even when it comes to taxes.
Here is an overview of the Personal Services Business ("PSB") rules which the Canadian Revenue Agency ("CRA") considers when reviewing small business corporations.
Summary of business structures
In accordance with the Income Tax Act 1985 ("the Act"), income tax is payable on income received from consulting services of a business. For income tax purposes a business is "an activity that you intend to carry on for profit and there is evidence to support that intention" i .
A business can be carried out through a variety of structures of which the most common are sole proprietorship, a partnership and a corporation. The structure a business is run through ultimately determines the amount of taxes payable. Many contractors choose to set up an incorporated entity to be self-employed through as "corporations are taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate"ii in addition to other fiscal advantages.
If your relationship with a client ("the payer") could be seen as an employee-employer relationship, your corporation might be considered a PSB.
No Recent Changes in PSB rules
The drafted tax law and common law (case precedents) which set the tests to determine whether a PSB exists or not, have not materially changed recently, despite what the media is reporting. However, the CRA is undertaking more audit activity in this area recently and accordingly PSB's have become a common topic of discussion.
Details on PSB determination
The rules to determine whether a PSB exists are common law based and not yet formally drafted into legislation. Each potential situation needs to be, and will be, looked at on a case by case basis. The CRA has released an interpretation bulletin and guidelines with the following list of factors to be considered:
- Whether the intention was to enter a 'contract of service' (employer-employee relationship) or to enter a 'contract for services' (business to business relationship)
- Whether the contract adequately reflects the intention of the contract
- The level of control the payer has over the worker's activities. Items to be considered are who has the right to control the amount, the nature, the direction, the manner and the work hours of the work to be completed
- Who provides the tools, equipment, materials and facilities to the worker
- Whether the worker is able to subcontract the work or hire assistants
- What degree of financial risk does the worker take
- What degree of responsibility for investment and management does the worker hold
- What is the worker's opportunity for profit
The following are factors that if followed, will reduce the likelihood of the corporation being deemed a PSB:
- The payer is well aware the contract is for services through an incorporation
- The individual has control over their work hours
- The individual has control of the work methodology
- The individual own the tools used to provide services
- The individual is able to hire employees or subcontractors and does so where possible
- The individual actively looks at different contracting opportunities when they arise
- The individual restricts attendance at employee functions unless paid to attend
- The individual establishes a true business presence through having a formal accountant prepare books, tax returns and records and always ensures the corporation enters agreements as a separate entity
- The individual seeks independent professional advice
Your Corporation's Contract with S.i. Systems
Your corporation's contract with S.i. Systems is a business to business contract that details your corporation provides a 'contract for services' as an incorporated business. The following are a few of the highlights of your corporation's agreement with S.i. Systems that align with the aforementioned guidelines:
- The contract is a business to business agreement for a 'contract for services'
- The contract is directly between S.i. Systems and your incorporation (a separate legal entity)
- Your corporation is registered for GST or HST and the registration details are used in all S.i. Systems transactions
- The contract proposes an authorized representative will undertake the work, but provides that the authorized representative can be reassigned at any time
- The payer for services under the contract is S.i. Systems and not the client S.i .Systems has a contract with. As such the hours and work are directed by your corporation not the end client
- Your corporation provides its services to S.i. Systems on a non-exclusive basis and is not restricted from providing services to other clients
- Your corporation bears financial risk as payment for services is only received after an approved timesheet is received by S.i. Systems
- Your corporation is required to maintain its own computer and associated tools (email, excel, accounting, and any associated documentation), related to the business, in addition to many holding their own cell phones
- Each contract has a specified term and a defined end date
If you are an incorporated consultant we recommend that you seek independent tax advice on how best to run your business and correctly remit taxes. Many large firms provide accountants that specialize in small businesses and will provide professional and transparent tax advice. S.i. Systems is not a tax advisor and hence the information above is prepared as a guideline only.
For more information please refer to the CRA guidelines under publication RC4110, access the relevant information bulletins, read the appropriate case law and talk to your tax advisor.
You can also refer to the following Alberta government information:
- Canada Revenue website http://www.cra-arc.gc.ca/tx/bsnss/sm/sttng/menu-eng.html
- Industry Canada website http://www.ic.gc.ca/eic/site/icgc.nsf/eng/home