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Personal Services Business (PSB) Solutions

If you have concerns about Personal Services Business (PSB) legislation and your specific circumstances pick up the phone and call us, or better yet, come in to our Calgary office for a free consultation and an explanation. Each situation and business is unique so you need to 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?

A PSB exists where there is a working relationship between a worker and an employer which could be viewed as a employer-employee relationship except for the existence of a corporation owned by the worker through which the worker provides services, and through which the employer pays the worker for their services.

How is the employer affected by PSB legislation?

The employer is NOT affected by having an incorporated individual deemed a PSB. The employer is NOT liable for any taxes, cannot be fined or censured in anyway by the CRA. To be clear all consequences reside with and are the responsibility of the incorporated worker.

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 9% 28%
Provincial Tax Rate (AB)  2%  10%
Total Tax  11%  38%
Penalty on Non-compliance  0%  5%
Total Tax Rates to all Governments  11%  43%
Expenses Allowed ALL NONE
Dividends Allowed YES NO

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.

  1. 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.
  2. Use a Third Party – If you are in the oil and gas industry then you are likely working through a third party. 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. KD has been using the same 3rd party company for its clients for over a decade.

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.

Audit Support / CRA Audit Representation

It is never a good idea to deal with the CRA on your own. They use tax and accounting terms which you may not fully understand. If the CRA contact you chances are they THINK that you did something wrong or owe them money. Don't go alone to meet with the CRA, KD Professional can provide you with CRA audit representation!

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 CRA issues or have been contacted by the CRA for the purposes of a review or audit, call us. CRA audit representation is MUCH cheaper than the tax bill that the CRA may present you with after ripping your records apart.

In light of this advice here are some pointers you can use if you ever find yourself dealing with the CRA.

  • If the CRA calls you on the phone do not answer their questions. Request that they send you a letter outlining what they information they want and who is requesting it.
  • Never give the CRA your original documents. Not only are copies acceptable but the CRA audit manual states this as a fact. Facts aside, if the CRA loses your records, or they get lost in the mail the CRA will not show leniency.
  • Always ensure that you review your business records prior to letting the CRA see them. As part of this process make sure that all personal non-business records are removed from containing your business records.
  • Ensure that your records are organized in order to make the review process easy.
  • Never assume that the CRA is correct and unbeatable. They are often wrong and have assessments overturned by the Appeals section.
  • The CRA regularly loses in Tax Court.
  • Never assume that giving in will make it all go away and prevent the CRA from digging deeper or auditing other areas or taxes (ie GST). It is common practice for the CRA to take the results of one audit (Income Tax) and use it as a basis for assessing on another audit (GST).
  • Always deal with CRA issues in a timely fashion. Ignoring them or delaying will only cause bigger problems, or prevent you from being able to exercise all you rights.

Objecting and Appealing

  • If you don’t agree with the outcome of an audit you can object or appeal the audit assessment.
  • Objecting and appealing cannot make the outcome of the audit any worse. CRA Appeals cannot increase the amount of the assessment.
  • In order to be successful in your appeal you must be able to provide additional documentation or argue valid points that show how the auditor misapplied tax law.

If you want to enhance your chances of success let our CRA expert put his knowledge to use to solve your CRA issues.

See our Blogs for other insights and actual stories of CRA interactions.

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Personal Tax Services and Accounting in Calgary

Let our experienced personal tax accountants take the hassle out of filing your personal income tax returns. Our seasoned personal tax accountants stand behind their work and ensure you take advantage of all the deductions and credits, while making sure you meet all of the ever-changing requirements of Canada's Income Tax Act.

Let’s face it there is so much to know when it comes to tax, and the bigger problem is that tax laws changes regularly. This is why you should not file your tax return on your own. The costs of missing things or filing incorrectly will be much more costly than paying the extra $100+ for a professional to do the return.

KD and our team of personal tax accountants remain on top of the Tax Act as well as all changes made so you can assure that we can help ensure you pay the lowest tax possible. Let us ease the burden of tax time through using our checklists (available in the downloads section of our website) and through consultation. All personal tax clients get a free hour of consultation where we can help you with your tax plan so you can have more tax savings in the years to come.

If you are a Corporate client as well, KD will ensure that we tie in the personal taxes and planning with the Corporate taxes. This is very key and is where a lot of the savings in taxes happen for business owners. If you have rental properties, a sole proprietorship or employment expenses, let us guide you to avoid pitfalls and ensure you maximize all tax savings associated.

Do not wait until the end of April to get your taxes prepared, start early. The earlier you start the process, the smoother it will be as the end of April is always a mad rush for all the people filing last minute. If you are expecting a refund, then filing earlier will allow you to get the refund earlier. If you owe you can still file earlier, but do not have to pay the taxes until April 30th which can now be simply done online!

If you are behind on your taxes let KD Professional help you get caught up and stay caught up.

Don’t let taxes weigh you down! Let KD’s team of personal tax accountants help you with all your tax and planning needs!

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