What is a Personal Services Business (PSB)?

Being classified as a Personal Services Business (PSB) has significant implications for both individuals and businesses. Understanding the details and consequences of this classification is crucial for anyone providing professional services. Let’s explore the key factors that define a PSB and the impact it has.

Understanding PSBs

A PSB is a specific business entity recognized by the Canadian tax authorities. It refers to a business where an individual provides services to clients through an intermediary, like a corporation or partnership. If the services were provided directly by the individual, an employer-employee relationship would exist.

The Canada Revenue Agency (CRA) considers several factors when determining if a business qualifies as a PSB:

Factors Considered by the CRA

  • Control: The more control the client has over the work, the more likely it is to be classified as a PSB.
  • Ownership of tools and equipment: If the business provides and uses its tools, it suggests a business-like arrangement, reducing the chances of being a PSB.
  • Subcontracting or delegation: The ability to hire subcontractors indicates a business setup rather than an employee relationship.
  • Financial risk and opportunity for profit: Assuming financial risk and the potential for profit or loss shows independence, characteristic of a business.
  • Integration and exclusivity: If the individual is essential to the client’s operations and works exclusively for them, it suggests an employer-employee relationship.

The Implications of Being Declared a PSB

Being classified as a PSB carries serious consequences:

  • Higher Corporate Tax Rate: PSBs lose eligibility for the small business tax rate and face a higher corporate tax rate.
  • Limited Tax Deductions: PSBs cannot claim certain tax deductions and credits available to other businesses, leading to a higher tax burden.
  • Administrative Obligations: PSBs must remit income tax and Canada Pension Plan (CPP) contributions for individuals providing services, increasing administrative costs.
  • Limited Liability Protection: Unlike other incorporated businesses, PSBs may not have the same level of limited liability protection, risking personal assets.
  • Personal Liability: Individuals in a PSB may be personally liable for legal claims or debts, leading to potential financial and legal risks.
  • Client Limitations: PSBs may be restricted from working with certain clients, such as government contracts, limiting business growth.
  • Risk to Existing Contracts: Being classified as a PSB may cause clients to terminate or re-evaluate contracts, disrupting business.
  • Increased Scrutiny: PSBs face higher scrutiny from the CRA, increasing the risk of audits, penalties, and reassessments.
  • Misclassification Consequences: Incorrectly operating as a PSB can result in penalties, interest, and reassessment of tax liabilities, causing financial hardship.

Conclusion

Being declared a PSB significantly impacts individuals and businesses. By understanding these implications and seeking professional advice, businesses can better navigate tax and legal challenges. Proper management and compliance can protect financial health and ensure success in the professional services sector.