PSB in Canada: Are You an Employee in Disguise?
So you landed a contract gig—nice. But if you’re billing through your own corporation, the CRA might ask:
“If your company didn’t exist, would you basically be an employee of your client?”
If the answer is “yeah, kinda,” your corporation could be a Personal Services Business (PSB)—and the tax rules change fast.
🚩 When Do PSB Rules Apply?
A corporation is carrying on a PSB only if all five conditions are met:
- You provide services through a corporation.
- You (or a related person) are a specified shareholder (≥10%) of that corporation.
- The corporation has 5 or fewer full‑time employees in the business for the year.
- The amounts weren’t paid by an associated corporation.
- If your corporation didn’t exist, you’d reasonably be considered an employee of the client.
How does CRA decide “employee vs. independent”?
They look at:
- Control over your work
- Ownership of tools
- Chance of profit / risk of loss
- Integration into the client’s business
No single factor wins the day—CRA looks at the full picture.
Example: You’re a designer. You incorporate and invoice one company, follow their hours, use their systems, and report to their manager. CRA could view you as an employee in disguise → PSB risk.
💸 Why It Matters (aka, the Tax Sting)
If you’re a PSB, your corporation:
- Doesn’t get the Small Business Deduction (SBD)
- Doesn’t get the 13% general rate reduction
- Pays an extra 5% federal tax on PSB income
Net effect: ~33% federal tax on PSB income plus provincial corporate tax — much higher than the usual small‑biz rates.
🧾 Deductions Are Limited
You can deduct:
- Salaries/wages/benefits you pay
- Certain selling/contract‑negotiation costs (if an employee could deduct them)
- Legal fees to collect receivables
Most other typical business write‑offs (e.g., laptops, meals) are off the table for PSB income.
🔍 How to Reduce PSB Risk
- ✅ Work with multiple clients
- ✅ Set your own hours and use your own tools
- ✅ Take on business risk and show potential for profit
- ✅ Hire more than five full‑time employees throughout the year
- ✅ Provide services to an associated corporation
- ✅ Use contracts that reflect independent contractor status
⚠️ Subcontractors alone don’t count toward the 5-employee threshold.
🌟 Why Should You Care
Freelancing and creator work are booming. Incorporating can be a power move, but PSB rules can erase the tax benefits and even cost you more overall if you don’t structure things right.
Before you incorporate, ask:
- Am I building a real business (multiple clients, control, risk)?
- Or am I doing a job‑like role for one payer under their control?
✅ Quick PSB Checklist
- Am I a specified shareholder (≥10%)?
- Do I have ≤5 full-time employees?
- Is my client unrelated (not an associated corporation)?
- Would I be considered an employee without the corporation?
- Am I using the client’s tools or following their schedule?
- Do I have only one main client?
- Am I missing business risk or profit opportunity?
If you checked most of these, talk to an accountant before incorporating.
Nuts & Bolts Summary
PSB Tax Formula:
No SBD + No general rate reduction + 5% extra federal tax → ~33% federal + provincial.
📢Need help filing taxes?
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Disclaimer: This post is for educational purposes only and does not constitute tax advice. Individual circumstances vary, and you should consult a qualified tax professional for advice tailored to your situation. Hesabu Limited is not responsible for any actions taken based on the information provided.
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