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The Personal Services Business


If you have a small consulting business in Canada, you have probably heard something about personal services businesses (PSB) either from your accountant or in the local coffee shop. Consulting businesses are prevalent in the Canadian oil and gas industries, as in many other industries.

PSB legislation is concerned with situations where there is an “incorporated employee” providing services to another company.

Being assessed as a PSB has many negative income tax effects, such as the loss of the small business deduction and the denial of many expenses. This can lead to a large tax reassessment for the company. The one benefit of being assessed as a PSB is the income would be included in the General Rate Income Pool and could lead to paying eligible dividends to the shareholder.

During a PSB audit, the auditor will ask many questions to attempt to determine the exact nature of the relationship between the two companies. These questions are meant to determine the answers to the four tests, which the courts have created in their determination if the relationship is that of employer/employee or subcontractor.

There are four tests to consider whether a company is a PSB:

  • Control – how much control does the company / operator have over their work? An employee would have little control while an independent contractor would have more control.
  • Chance of Profit / Risk of Loss – does the company have an ability to increase its income or is there the risk that the company would have financial loss? An employee works for a salary or hourly wage, and would not have risk of loss or chance of profit. An employee gets paid a set amount, while an independent contractor can increase their income through efficiencies, and also has risk of financial loss.
  • Ownership of tools – does the company provide the tools to complete the contracts? Normally, an employer provides an employee with the tools to do their job, but an independent contractor would provide their own tools.
  • Integration – is the company / operator integrated into the payer corporation? An employee is integrated into the operations of their employer, while an independent contractor is not integrated into the payer corporation.

During a PSB audit, as in any audit, it is suggested that you seek assistance from your accountant or a tax specialist during the process. This is a very technical and fact driven area of the Income Tax Act, and it helps to be prepared and have proper representation.

If you have questions regarding personal services businesses, don’t hesitate to contact me or your local MNP advisor.