Hi all,
My accountant filed my corporate end of year and filed me as a Personal Service Business. I'm pretty angry as I spoke to them earlier in the year and said I wasn't because:
I deliberately pursue multiple contracts (3 distinct large contracts during the business year roughly 1/3 revenue each contract)
I provide my own equipment
I control my own hours
etc...
From what I can tell, it looks like I have to pay a huge amount of tax now as all income is being salaried through me and nothing going to my spouse (also a shareholder).
So some questions:
Can I get them to re-file not as a Personal Service Business?
Would there be a mark against my record?
My accountants seem to be very conservative and are always pushing me to be declared as a Personal Service Business. Is this normal?
Hello, I don't know if you've resolved your issue with the PSB classification. Here's some stuff.
I do books for a living, for 45 years, and to me you don't sound like a PSB.
If you search Personal Service Business on the CRA site, you will get no hits.
PSB's are legislated in section 125 of the Income Tax Act.
There are thousands upon thousands of appeals going on right now from people who have been re-classified as a PSB.
Definitely get a different accountant.
Re-classification to non-PSB status would have no affect until the CRA looked at the adjustment an accountant would submit. Since you have been paying as a PSB there would be no monetary ramifications if the CRA doesn't allow the change, except what you would have to pay the accountant.
A PSB designation means the CRA looks at you as an employee of the company you contract to. This limits allowable expenses to your wages and salaries.
If you don't get the new classification, I would advise you to close the corporation and file as self-employed. Self-employment income has a lot more expenses you can claim, including a salary to your wife as your bookkeeper. You can look at this form at Revenue Canada. It's a T2125.
The existence of a “business presence” normally indicates a worker is self-employed.
Listed below are some examples given by CRA (as described on
http://www.cra-arc.gc.ca/tx/hm/xplnd/stts/cnstrctn-eng.html) of a business presence that a self-employed worker may exhibit .
•The worker has developed accounts with suppliers and clients.
• The worker advertises his or her services for hire in the newspaper, the yellow pages, or specialized trade journals.
• The worker maintains an office and staff.
• The worker has his or her own liability insurance.
• The worker has a business license.
• The worker is registered as a business with different government departments and agencies for things such as goods and services tax or business name registrations.
• The worker maintains a separate bank account for the business, and the worker negotiates business loans or a line of credit.
• The worker has a separate business telephone line.
• The fact that a worker is a member of a trade union does not exclude the worker from being a self-
Below are some quotes from a big CA firm out of Ontario about avoiding PSB classification.
If you’re a small business owner, you’ve probably heard of the personal services business designation before. While an independent company, personal service businesses are essentially incorporated employees. They provide independent consultation or service to a client in a way which could be considered an employee-employer relationship. If the CRA decides that your business is, in effect, an employee of another business, this will have a major impact on your tax status.
The risk of being classified as a personal services business by CRA could come as a surprise to some of you, but it is becoming a reality for many individuals. If you are a business with under 5 employees, or a business whose revenue comes from a single client, you are at the greatest risk for this classification. If classified under this group, you could lose many of the tax benefits you would have as an incorporated individual. The CRA has re-designated many IT consulting companies as personal service businesses in recent years
What Does Reclassification Mean for You?
Personal services businesses are subject to hefty tax rates. If the CRA labels your corporation in this category, you will have to pay the standard corporate tax rate rather than the dramatically reduced small business tax rate. In addition, personal services businesses are extremely limited in the business expense deductions. While small businesses are able to claim a wide-range of expenses, from advertising to transportation to training costs, personal services businesses may only claim wages and salaries. These tax rules also prevent independent contractors from other tax benefits such as income splitting.
All in all, a company classified as a personal services business will not be able to make the most of their revenue because of such heavy taxation. If you are deemed to be a personal services business, reassessment could end up costing you well into the thousands of dollars.
If this were the extent of the tax implications, that would be frightening enough. However, a reclassification to a personal services business by CRA can cause much greater damage. In some cases, auditors have reassessed individual for past years as well. A reassessment covering multiple years could lead to tax bills in the hundreds of thousands of dollars. The thought of being classified as a personal service business by the CRA might run shivers down your spine, but don’t worry, there are certain preventative measures that we can help you take to avoid this danger.
Avoiding Personal Services Business Classification
There are steps you can take to protect your business and provide you with financial security. In order to protect yourself from designation as a personal service business by the CRA, and avoid the trauma of a possible CRA audit, you should implement the following:
•Make a clear distinction between a business relationship and an employer-employee relationship. This should be done with a clearly written contract. You should have your contract reviewed by a lawyer who is experienced with personal services businesses specifically, not just in the tax field. There is a risk of a revaluation by the CRA coming at any time, so it is important to be prepared ahead of time.
•Provide a professional image for your company. If you want to be treated like a company, not an employee, you need to set up and treat your company appropriately. Use a name not a numbered company, set up a website and general online presence, print business cards, and use appropriate business language. Also, try to stay off of the company phone directory. When you are on the company’s phone list, you won’t look so much like an independent IT consultant.
•In order to minimize the risk of being grouped as a personal service business by the CRA, you want to have liability insurance coverage as well. It is best to be protected at all times, especially when you’re conducting business as an independent.
•The process through which you conduct business tells the CRA a lot about whether you’re a personal services business or not. A personal service business receives specific details on how it should conduct its business from the client. An independent contractor should have full control over the manner in which it provides results for its client. You should ensure that your contract and your conduct don’t appear to be under the control of the client company. This means that your client and the contract should indicate what they want you to do, not how they want you to do it. Consider the analogy of hiring a painter. You would tell a painter what room you want painted and what colour you want it painted, but you would not tell him how to do the painting. They are an independent expert who you have contracted to do a specific job and they control the work process.
