Rule Changes Target Personal Service Businesses
If you provide services through a corporation, or employ such persons, you should be aware that recent legislative changes have dramatically increased the tax risks of such arrangements. According to these legislative changes, the tax payable by Personal Services Businesses (PSB) has been significantly increased. In addition to losing the ability to deduct most business expenses, if a worker’s corporation is considered to be a PSB, then the corporate tax rate will increase from 14% to 38%.
A PSB is defined in the Income Tax Act to include a business carried on by a corporation through which services are provided by an individual who would, but for the existence of the corporation, be considered an employee of the recipient of the services. There are a number of factors that are relevant in this analysis. For example, does the employer provide you with a computer, an office, or a business card? Do you control your own hours? Can you subcontract out? There are many other factors that can be relevant. However, if you work for only one client, then Canada Revenue Agency (CRA) will likely consider your company to be a PSB and reassess corporate taxes at much higher rates.
As a result of these changes, incorporated workers are at risk of significant negative tax consequences. These changes have increased the likelihood that the CRA will conduct wholesale audits of incorporated workers. Employers will be at significant financial and operational risk. They may experience severe disruptions as their workers are forced into legal, financial and personal distress by the CRA.
Invitation for Discussion:
Shea Nerland LLP has developed solutions enabling proactive employers and contractors to insulate themselves from these risks. For details, contact Matthew Clark at (403) 299-9620, Robert Worthington at (403) 536-9587 or contact the Tax Law group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.