Tax Implications for Personal Services Businesses in North York

Navigating the complex web of corporate taxes in North York can be challenging. If you've incorporated your business to provide services exclusively to another company, you might unknowingly be operating what's termed as a personal services business (PSB). The Canada Revenue Agency (CRA) has specific tax implications for such entities, and non-compliance can have financial and legal repercussions.

What Constitutes a Personal Services Business (PSB)?

A PSB typically exists when the individual providing the service would be viewed as an employee of the hiring company if not for their corporation. It's sometimes termed as an 'incorporated employee'.

For a corporation to be considered operating a PSB, it must meet several conditions, as defined by the Income Tax Act:

The service provider, or the incorporated employee, should be a significant shareholder of the corporation.

Without the corporation, the service provider would be deemed an employee of the service recipient.

The corporation has no more than five full-time employees during the tax year.

The service payment to the corporation isn't from a secondary related corporation.

For context, consider the example of Tam. He accepts a contract position from ABC Trucking in Ontario, but with the condition that he offers his services via a corporation. He creates 858689 Ontario Inc., with him as the sole shareholder and employee. The only client for his company is ABC Trucking. In this scenario, 858689 Ontario Inc. operates as a PSB.

Tax Implications for PSBs in North York

PSBs face unique tax obligations:

Tax Rates:

Unlike other corporations, PSBs can't avail the general tax rate reduction or the small business deduction. They are liable for the complete federal and provincial corporate tax rates, with an added 5%.

Eligible Deductions:

PSBs can only deduct specific expenses, including salaries and benefits paid to its incorporated employees, certain associated sales expenses, and legal fees related to debt collection.

Filing & Payments:

PSBs must file the T2 Corporation Income Tax Return and clear any dues by the corporate tax deadline. However, while filling out the T2 return, it's essential to remember that PSBs don't qualify for the same deductions as other corporations and are subject to a higher tax rate.

To ensure that PSBs in North York understand their obligations, the CRA has launched an educational outreach program. The results of this initiative are being analyzed to fine-tune the subsequent steps of this pilot.

Stay Updated with Your North York Corporate Lawyer

As a business owner in North York, staying compliant with your tax obligations is crucial. Engaging with a seasoned corporate lawyer in North York can provide you with tailored advice and insights, helping you navigate the intricate realm of PSBs and corporate tax.