Personal Services Business
When an incorporated contractor is a personal services business, what it costs, and how to reduce the risk.
The short version
- A personal services business (PSB) is a corporation that provides services through an owner (or a person related to an owner) who would reasonably be an employee of the client if the corporation didn't exist.
- It doesn't apply if the corporation has more than five full-time employees throughout the year, or if the services go to an associated corporation.
- PSB income gets no small business deduction and no general rate reduction, and pays an extra 5%: 33% federal, about 44.5% combined in Ontario, against 11.2% for a qualifying small business.
- Deductions are cut to almost nothing: mainly salary, wages and benefits paid to the incorporated employee, plus a few employee-type expenses and legal costs of collecting fees.
- CRA decides with the same employee-or-contractor tests it uses for individuals: control, tools, financial risk, chance of profit, and how the work fits into the client's business.
Personal Services Business Rules in Canada
The pitch is attractive: incorporate, bill your one client through your company, pay 11% or 12% corporate tax instead of 40-something personal, and deduct your car. The client likes it too, since it saves CPP, EI and vacation pay. Everyone wins, until CRA reviews the arrangement and concludes the corporation is a personal services business. Then the tax rate roughly quadruples and most of the deductions vanish, for every open year. Here's how CRA decides, what it costs, and what you can do about it.
When a Corporation Is a PSB
| Condition | Meaning |
|---|---|
| Services are provided by an "incorporated employee" | A shareholder owning 10% or more of any class of shares, or a person related to one |
| The worker would be an employee of the client but for the corporation | Judged on the real working relationship, not the contract |
| Not more than five full-time employees | Six or more full-time employees throughout the year takes the corporation out of the PSB rules |
| Client is not an associated corporation | Services to an associated company don't make a PSB |
The middle row is the whole fight. CRA and the courts use the same tests as for any worker: who controls how, when and where the work is done; who supplies the tools; whether the worker can hire helpers; who carries financial risk and can make a profit or a loss; and whether the work is integrated into the client's business. See contractor vs employee for the full test.
Typical Red Flags
- One client, often a former employer, for years.
- Set hours, a desk and an email address at the client, and a manager who assigns the work.
- Paid by the hour or day, with no way to lose money on a job.
- The client supplies the laptop, the truck or the tools.
- Same work as the client's own employees down the hall.
Industries CRA has looked at closely include IT and engineering contracting, trucking (drivers incorporated to haul for one carrier) and some professional and medical roles. CRA has run audit projects on trucking PSBs specifically.
Could your corporation be a personal services business?
Describe your clients, contracts, hours, tools and how you're paid. The assistant walks through each factor, tells you which way it points, and what would reduce the risk.
What It Costs: Ontario Example
An incorporated IT consultant bills one client $200,000 in a year, spends $20,000 on a car, home office and software, and pays no salary, leaving profit in the company.
| Treated as a small business | Reassessed as a PSB | |
|---|---|---|
| Deductible expenses | $20,000 | $0 (none are salary or benefits) |
| Taxable income | $180,000 | $200,000 |
| Rate | 11.2% (9% + 2.2%) | 44.5% (33% + 11.5%) |
| Corporate tax | $20,160 | $89,000 |
That's about $68,800 more for one year, before interest, possible penalties, and the personal tax still due when the money comes out as dividends. CRA can usually reassess three years back for a CCPC. This is where a cheap structure gets very expensive.
The Main Defence: Pay Salary
Salary and benefits paid to the incorporated employee remain deductible in a PSB. A corporation that pays out its income as salary each year has little or no taxable income left for the 44.5% rate to bite on. You lose the deferral that made incorporating attractive, but the PSB risk mostly becomes a paperwork question. The comparison is on salary vs dividends.
Ways to Reduce the Risk
- Have more than one client, and a real way to find new ones.
- Control the work: your methods, your schedule, your deliverables, priced by the project where you can.
- Own the tools and carry your own insurance.
- Hire helpers or subcontractors when the work allows it.
- Write the contract to match reality, since CRA looks at what actually happens.
- Grow past five full-time employees, which takes you out of the rules altogether.
If the client is honest about wanting an employee, it may be cheaper all round to be one. The numbers for working as an individual contractor instead are on independent contractor taxes, and whether incorporating is worth it at all on corporation vs sole proprietorship.
PSB and the Rest of Your Tax
- GST/HST: the corporation still charges it once over the $30,000 small supplier threshold; see GST/HST for consultants.
- T2: PSB income is reported on the corporation's T2 return; it's excluded from the small business deduction.
- T4A: clients report fees paid to the corporation; CRA matches them.
- Rates: every province's general rate is on corporate tax rates.
Reassessed as a personal services business?
Upload the proposal letter or reassessment. The SmartFile checks the facts CRA relied on against the employee-or-contractor factors and drafts your response or notice of objection.
Personal Services Business Questions
What is a personal services business in Canada?
A corporation that provides services through a shareholder owning 10% or more, or a related person, who would reasonably be considered an employee of the client if the corporation did not exist, unless the corporation has more than five full-time employees or the client is an associated corporation.
What is the tax rate on personal services business income?
The federal rate is 33%, because the small business deduction and general rate reduction are denied and an extra 5% applies. With Ontario’s 11.5% general rate, the combined rate is about 44.5%.
What expenses can a personal services business deduct?
Mainly salary, wages and benefits paid to the incorporated employee, certain costs an employee could deduct, and legal expenses to collect amounts owed. Most other business expenses are denied.
How do I avoid being a personal services business?
Operate as a real business: several clients, your own tools and methods, financial risk and a chance of profit. Paying out income as salary reduces the cost if CRA does apply the rules.
Does the five-employee rule really help?
Yes. A corporation that employs more than five full-time employees throughout the year is not a personal services business, but the employees must be real and full-time.
Sources: CRA, Personal services business fact sheet; Worker who performs services on behalf of their own corporation; Corporation tax rates. Checked October 2026. The list of allowed deductions is a summary of paragraph 18(1)(p) of the Income Tax Act as we understand it. The Ontario combined rate assumes the provincial general rate applies to PSB income. The example ignores interest, penalties and personal tax on dividends.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.