The term Personal Services Business, also known as PSB, may not be familiar to you, especially if you are an employee or head of a company with more than 6 full-time employees. On the other hand, if you are an entrepreneur and work as a self-employed person, you should recognize this term. Indeed, it falls under the Income Tax Act and can have significant tax consequences for entrepreneurs that can be highly penalizing for a young company.
Find out about the personal services business tax term and its key features.
What is a personal services business determination?
The Canada Revenue Agency (CRA) assigns the personal services business determination when a company provides services that can be performed by an employee of the client company and when the latter provides the toolset and equipment needed to deliver the services.
This means that if you are an entrepreneur and perform work within a client organization as if you were an employee, you are likely to receive the PSB tax determination. In fact, your client relationship could be perceived as an employee-employer relationship and you would therefore have the status of an incorporated employee rather than self-employed person. Being granted this status can have a significant impact because you would no longer qualify for the small business deduction (SBD) and can no longer deduct your business expenses.
What criteria determine an employee-employer relationship?
In order to preserve your business and avoid being an incorporated employee, it is essential to know the criteria that determine the employee-employer relationship. The CRA considers a number of factors in determining whether a consultant should be considered a personal services business. Here are the 6 main criteria analyzed:
- Does the consultant have one or more clients?
- In the employment relationship, who decides on the procedures and the working process?
- Who provides the tools, equipment, office, etc.?
- Does the consultant take financial risks?
- Does he also take risks in the delivery of the work?
- Does the consultant have the opportunity to hire subcontractors or assistants to do the work?
Improve certain criteria to better prepare
In order to avoid a possible new corporate tax status, it is worth reading and understanding all the criteria analyzed by the Canada Revenue Agency.
The payer's control over the worker's activities
In order to define whether a business meets the criteria of a PSB, the Revenue Canada Agency is interested in many points regarding the payer's control over all of the activities performed by the external worker.
They will therefore consider the following points:
- Does the payer control the work done daily or only after the end result?
- Does the worker have the right to have other clients?
- Does the payer define the worker's tasks?
- Does the worker receive training from the client?
- Can the consultant worker hire subcontractors or assistants to perform the work?
- Is presence in the workplace obligatory?
- How are quality control processes enforced?
- How is task assignment performed? Is it daily? Is it an end goal?
A self-employed worker is usually unsupervised. He works whenever and wherever he wants as long as his assignment is carried out. Moreover, he has no obligation of loyalty or security.
Ownership of tools and equipment
One of the most important criteria is the ownership of the tools and equipment needed to carry out the work. In effect, the CRA regulates who supplies the work equipment whether tools, desks or any other equipment. If the client organization owns the equipment and makes it available to you, then you are more likely to be perceived as a personal services business. In order to maintain your status as a self-employed person, it is recommended that you obtain your own equipment.
Financial risk for the consultant
The Revenue Canada Agency will also focus on various aspects of the financial risk incurred by the consultant, namely:
- Are there financial risks for the worker or does the payer assume all costs?
- Did the worker make a major investment to provide these services?
- Is there a business risk?
- Can the consultant make a profit or loss?
- How is the worker paid?
How to avoid the personal services business determination
In order not to be considered a personal services business, it is essential to clearly establish the working relationship between the worker and the client company. To this end, it is recommended to first write a contract, listing all the working conditions defined between the two parties. However, even if the common agreement and the written agreement are clear, the actual working conditions may be different.
To emphasize your status as a self-employed worker, be the boss of your work and your organization. Define your own work schedules, decide the different tasks and their implementation, have your own materials and, if possible, hire someone to assist you in your work.
Get a tax expert’s advice on your status
Do you have doubts about the sustainability of your self-employment status and believe that you are likely to receive the tax status of a personal services business? Get a tax expert’s advice by contacting the T2inc team. We can discuss your professional situation and provide you with the necessary guidance to maintain your status.