Please find the beginning of the article in our previous post.
Educational Outreach, helping you comply with your obligations
The CRA launched an educational outreach project to help industries that hire personal service business (PSB) understand and comply with the tax obligations associated with this type of arrangement.
Between June and December 2022, CRA officials are contacting Canadian businesses from a sample of different industries that potentially hire PSBs to help determine whether or not these companies are fulfilling their tax obligations. As part of this project, the CRA officials are asking the businesses to provide documentation on the nature of their payer/payee relationship, such as accounting books, records and contracts.
If you are a PSB, or are an incorporated individual, you will not be contacted, but the business that hired you may be and they may share information with you about the tax obligations associated with being a PSB.
Participation in this educational outreach project is voluntary. Businesses that choose to participate will benefit by gaining a better understanding of the requirements that must be met in order to comply with the Income Tax Act (ITA). This will reduce the likelihood of errors in future submissions to the CRA. For a list of requirements visit T4A – Information for payers – Canada.ca, Information for payers of the T5018 – Canada.ca, and Information for payers of the T1204 – Canada.ca.
This project will help to ensure that tax reporting errors are corrected and promote compliance with the ITA. As such, the CRA will advise businesses hiring PSBs of tax reporting errors so that they may be corrected.
Understanding the nature of your business arrangements is essential when it comes to complying with your tax obligations given that each type has its own reporting requirements. There may be legal and/or financial consequences for failure to report appropriately.
Tax deductions, tax rates, and eligible expenses for a personal services business
If you are an incorporated employee and your corporation is operating a personal services business, your tax obligations are different than other corporations.
Tax deductions and tax rates
A personal services business is not eligible for the general tax rate reduction or the small business deduction, which allow other corporations to reduce their corporate tax rates.
As a result, a personal services business is subject to the full federal and provincial corporate tax rates on all taxable income, plus an additional 5%.
Eligible expenses
A personal services business is limited in the expenses they may deduct. Expenses that may be deducted by a personal services businesses are outlined in the T2 Corporation- Income Tax Guide and are as follows:
- the salary and wages the corporation pays to its incorporated employee(s);
- any benefit or allowance the corporation provides to its incorporated employee(s);
- certain expenses of the corporation associated with selling property or negotiating contracts; and
- legal expenses incurred by the corporation in collecting amounts owing.
Please see the last part of the article in our next post.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this text accepts any contractual, tortious, or any other form of liability for its contents.
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