October 23, 2015
Incorporation offers legal advantages to sole proprietors of small businesses, including certain tax advantages. However, when a corporation carries on a “personal services business” (or “PSB”) as defined in the Income Tax Act (ITA), the corporation will no longer be eligible to enjoy the preferential tax treatment otherwise available to corporations.
“Personal Services Business” Defined. Subsection 125(7) of the ITA defines a PSB as a business of providing services carried on by a corporation where (a) an individual who performs services on behalf of the corporation (referred to as an “incorporated employee”) or (b) any person related to the incorporated employee is a specified shareholder of the corporation, and the incorporated employee would reasonably be regarded as an employee of the entity to which services were provided, but for the existence of the corporation – unless:
Income Tax Consequences. It’s important to be aware of the PSB rules because the ITA denies corporations that carry on PSBs certain forms of preferential tax treatment otherwise available to corporations, and additional liabilities could be imposed, including the following:
Strategies to Avoid PSB Status. There are two key strategies a corporation may employ to avoid characterization as a PSB under the ITA:
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Tax Solutions Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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