What Is A One-Person Personal Services Corporation?
One of the most common types of corporations is a business operated by one person (the owner of the corporation). This is common for tradespersons operating their own corporation, consultants of various fields such as oil-field consulting or I.T. consulting, and contractors performing various services.
Normally, under a corporation, there are various tax benefits for a person to perform work through their own corporation. These benefits include the small business tax deduction and the ability to defer taxation of income.
However, there is a risk that the Canada Revenue Agency (CRA) may deem your corporation to be a ‘Personal Services Corporation’. This simply means that you are deemed an incorporated employee or, in other words, you are seen as an employee of the business that you do work for. In this case, the CRA believes that you should be taxed as such, instead of as a corporation.
Taxes as a Personal Services Corporation
If you are deemed as a personal services corporation, there may be consequences as shown below:
- You will not be able to claim the Small Business Deduction.
- You will not be able to claim many of the normal business deductions such as supplies, office space, legal and accounting fees.
- Possible penalties and interest resulting from the above consequences. If you have filed as a corporation for previous years, CRA may reassess those past years and charge you extra tax in those years that you would have owed if your corporation would have filed as a personal services corporation. They may also charge interest and penalties on the amounts owing for past years.
All in all, being reassessed as a personal services corporation by CRA could potentially leave you with a significant tax bill.
How to Avoid This Classification
CRA uses the following checklist to determine if a corporation is to be deemed a personal services corporation:
- How much control over the work does the owner or contractor (I’ll refer to this person as the worker) have? This refers to the flexibility that the worker has over the work being done. In other words, is how the work is being done dictated by the worker or is the worker taking direction on how the work should be done.
- Who has ownership of the tools being used? This refers to who owns the physical tools being used by the worker to perform the work. A Welder who owns his own welding truck and equipment has a better argument to being an independent worker as does a welder who shows up to a certain company’s job site and has to use that company’s tools to perform the work.
- The chance of profit or risk of loss that a worker is exposed to. This refers to if the worker’s potential compensation is variable. For example, an IT company may pay an IT consultant a set price to perform a project. The IT consultant in this example has a better chance to be deemed an independent corporation than if the IT consultant was paid an hourly wage by the IT company.
- The degree of integration. This refers to the intention of the relationship between the worker and the customer business (company for which the work is being performed). This is a subjective test but generally refers to if the customer business has to meet the needs of the worker, then a legitimate business relationship likely exists. Or if the worker has to change his commercial activities to suit the needs of the customer business, then it’s more likely that an employer-employee relationship exists.
The above items are only guidelines in determining if a business is a personal services corporation. Generally, a good way to avoid this classification is by:
- Having more than one regular employee than yourself.
- Performing work for more than one client or customer.
- Substantiating work agreements with a written contract that sets out the intentions of yourself and the customer or client.
Even if your corporation is classed as a personal services business, you don’t have to dissolve your corporation if you don’t want to. The corporation is simply taxed at a higher rate of tax which reflects that the small business deduction is not used.
The whole area of personal services corporations is subjective so it’s not a clear cut set of rules. So if you are unsure of where your business stands, then you should speak to someone that is familiar in this area. Contact us for more information.