Personal Services Business (PSB) Solutions
At KD our Senior Tax & Accounting Manager worked for the CRA for 15 years in all aspects of audit. In our opinion his tax knowledge is second to none, and his knowledge of CRA procedure and policies is virtually unsurpassed in the public accounting industry. If you have concerns about PSB legislation and your specific circumstances pick up the phone and call us, or better yet, come in for a free consultation and an explanation. Each situation and business is unique find out what your options are, and how you can protect yourself.
Personal Services Business (PSB) legislation is extremely complex and vague. There are no absolutes and the CRA has been conspicuously quiet on the subject. There are no CRA Interpretation Bulletins that deal with the specifics of PSB. All you will find from the CRA is that PSB’s are not entitled to the small business deduction, and that expenses other than salary are not allowable.
In addition to the above there is a plethora of misinformation and fear mongering articles telling you how you are DOOMED if you are a contractor with only one client. Some accountants even take it upon themselves to “determine” if you are a PSB and will file your taxes as if you are. If you are told by anyone (even the CRA) that you are absolutely positively a PSB then you are likely being lied to.
In an effort to provide you with the best possible information about PSB legislation please check out the information below.
What is a PSB?
How is the employer affected by PSB legislation?
How is the employee affected by PSB legislation?
The Chart below shows the tax consequences to the worker of being deemed a PSB by the CRA in Alberta.
|Small Bus. Corp.||PSB|
|Federal Tax Rate||11%||28%|
|Provincial Tax Rate (AB)||3%||10%|
|Penalty on Non-compliance||0%||5%|
|Total Tax Rates to all Governments||14%||43%|
How to Protect Yourself
There is no one sure fire way to protect yourself, but there are measures you can take to greatly reduce the likelihood of the CRA successfully causing you grief. Below are ways that can reduce the probability of the CRA successfully deeming you a personal services business.
This DOES NOT guarantee that they won’t try (you may still have to go to court), but it increases your chances substantially of winning.
- Have multiple clients – Having multiple clients is a good indication that you are truly running a business. In order for this to be effective it is recommended that you gain at least 5-10% of your revenue from clients other than your “main” client. This is not a guarantee and you will not find this written anywhere, and the CRA will not give you this as a guideline. I use this number because there is nothing written in legislation on the issue. You should also note that if you are an accountant the secondary clients you have cannot be people for whom you mow the lawn or shovel snow. You must be performing similar services for all clients. Similar means only work using the same basic skills or knowledge.
- Use a Third Party – If you are in the oil and gas industry then you are likely working through a third party (SI Systems and Design Group are two that I know of, but there are lots of others). They function by contracting you to the “employer” but you invoice the third party who in turn invoices the “employer”. The employer then pays the third party and the third party pays your corporation. In order for this to work properly you must make sure that the contracts between all the parties are properly worded and that the contracts don’t specifically violate the Weibe Door court case.
Contract Wording (for Third party option)
When wording a contract there are certain things that just can’t be in a contract unless you want the CRA to deem you to be a PSB. While “employers” want to protect themselves, they have to consider the consequences to their contractors, since it is the contractor that bares all the risk for additional taxes and penalties. With this in mind below are some contract items that are key considerations that the CRA and Courts look at.
Non-compete agreements - This gives the employer “exclusivity” which means you can’t have other clients. This also shows a subservient relationship where the employer is dictating terms, which is not normal in a true business relationship.
Hours of Work – Hours of work clauses are necessary to define a relationship, however they should be as broad and flexible as possible. I recommend that wording be open ended and allow for working from home. Whether you choose to work from or are encouraged is irrelevant. You simply have to have the “ability” to set your work hours and work location. It is also good to work 6 hours one day and 10 hours another. This gives the appearance of setting your own working hours, and completing projects of your own accord.
Billing for Work – Billing for the work performed is important. Where possible you don’t want to be a 9-5, 8 hours per day “contractor”, because this gives the appearance of being an employee. It is understood that there are certain billing rates that will be in effect. This is normal in any industry. You want to avoid being reimbursed for expenses. If you have expenses they should be billed for on your invoice, and have GST added to the amount being billed for.
Equipment – At minimum you should have some of your own equipment, even if it is only a laptop computer, tablet, and cellphone.
Ability to replace yourself – While this is important the simplest way to deal with this is to remain silent in the contract. Ensure that the contract simply says that the contract is between XYZ Corp and 123 Corp. Don’t mention that “Bob” has to perform all the work, and definitely NEVER say that Bob is the corporate representative that MUST perform the work. To do so is asking for trouble.