What is a personal services business? The answer can be confusing, especially when you get into the tax jargon and lingo many companies use to describe it. Today, AF Accounting explains this business and why it matters for tax purposes.
Personal services business
Canada Revenue Agency’s (CRA) Corporation Income Tax Guide (Chapter 4) explains a Personal Services Business (PSB) as “a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform”.
The PSB label is something the CRA could attach to your business, and it is not necessarily in your best interest. If the CRA considers your company to be a PSB, you cannot claim standard small business expenses, including the Small Business Deduction.
An accountant who works for themselves is a great example of a personal services business. Many accountants work on their own and are incorporated under their own name, such as John Smith Accounting, Ltd. For these people, who often work alone but may employ a part time receptionist, they spend their time doing audits for major companies (among other duties), often at that company itself. In other cases, these accountants may not have their own independent office, but may in fact work full-time for another company as an in-house accountant.
Why does this matter?
Small businesses need to take advantage of the tax breaks designed for them in order to maximize profits. However, the PSB label takes away your right to these tax breaks. PSBs cannot claim business expenses, such as office supplies and the equipment they need to do their job. Additionally, losing out on the Small Business Tax Deduction means losing a good tax rate on the small business’ first $500,000 of income.
Unfortunately, PSBs could face sudden assessments. If the CRA performs an audit and decides your business is a PSB, you could face thousands of dollars in back taxes.
The situation is very unfortunate as the definition of PSB can often be misconstrued. A company may be operating, to the best of their knowledge, as a small business and not realize the CRA considers them a PSB until it is too late.
First determine if your business is considered a personal services business, and then calculate how the tax implications impact you and the business. If the impact is significant, you may want to restructure the corporation to counteract this, or decide if using the corporation still makes sense at all. This can be dependent upon the province you reside in.
Investigate where you stand today!
We can help
AF Accounting has helped clients achieve financial organization and growth since 2008. We are happy to help you determine if your company is a PSB in addition to our many other services. Contact us today to learn more about how we can help you achieve success.