Demystifying Tax Implications for Personal Services Businesses in Ontario: A Guide by a Guelph Accountant

Are you a business owner offering services to other companies? Understanding tax implications is essential. As an Ontario bookkeeper and Guelph accountant, I’ll guide you through the specifics. Navigating tax obligations for personal services businesses (PSBs) requires clarity. Let’s dive into the key aspects to ensure you’re on the right track.

Understanding PSBs in Ontario

If your business provides services through a corporation, you might be dealing with a PSB. As a Guelph accountant, I’ve seen a lot of clients coming to us at Wise Numbers saying they incorporated their business to pay less taxes when in fact they are operating as a PSB, which implicates different tax applications from a regular corporation.

If you answer Yes to the questions below, it means you are a PSB:

1. Specified Shareholder: Are you a shareholder of the corporation performing services?
2. Employee Status: Would you be considered an employee of the receiving company without the corporation?
3. Employee Count: Does your corporation have 5 or fewer full-time employees throughout the year?
4. Unrelated Income: Is the payment for services from an unrelated secondary corporation?

Some examples

Let’s explore practical scenarios to make it easier to understand the questions above:

• Example 1: Emily’s Cleaning Venture (PSB) Emily is in search of a job, and a cleaning company offers her a contract position via her corporation, “CleanWorks Inc.” She’s the sole shareholder and employee of CleanWorks Inc. All payments for services come from the cleaning company.

In this case, CleanWorks Inc. meets the conditions outlined in the Income Tax Act to be considered a personal services business due to:

• Emily being a specified shareholder
• Emily performing work equivalent to a cleaning company employee
• The sole income of CleanWorks Inc. being from services provided by Emily (incorporated employee) to the cleaning company.

• Example 2: Alex’s Tech Consultation (Non-PSB) Alex, together with colleagues, establishes “TechSolve Inc.” for coding and consulting. They use their equipment but don’t perform tasks typical of client employees. Their income comes from multiple clients and shareholders.

TechSolve Inc. doesn’t fit PSB criteria:

• Tasks differ from typical client employee work
• Income arises from multiple shareholders and diverse clients

As a result, TechSolve Inc. follows rules set by the Income Tax Act for other corporations.

• Example 3: Olivia’s Artistry (PSB) Olivia, a nail technician, incorporates “Artistic Nails Inc.” to work at a salon. She’s the sole shareholder/employee and uses the salon’s instruments and products.

Artistic Nails Inc. fulfills PSB criteria:

• Olivia being a specified shareholder and employee of Artistic Nails Inc.
• Olivia performing work like a salon employee using their tools
• The sole income of Artistic Nails Inc. coming from services rendered by Olivia (incorporated employee) to the salon.

Potential changes like using personal equipment, self-appointments, advertising, or hiring other manicurists could alter Olivia’s classification for income tax purposes.

What are the tax implications if I am considered a PSB?

Ontario accountants recognize PSBs face unique tax rules:

• Tax Rates: PSBs lack general tax rate reductions or small business deductions. They face full federal/provincial corporate rates plus 5%.
• Eligible Expenses: Deductible expenses include employee salaries, benefits, certain selling/contract-related costs, and legal debt collection expenses.

Meeting Filing and Payment Duties: PSBs follow standard filing/payment rules. Remember, deductions available to others might differ. Additional obligations like GST/HST withholding and payroll deductions apply.

What if I didn’t know about this status and always reported my taxes as a regular corporation?

If you suspect PSB status, rectify prior returns via the CRA’s Voluntary Disclosure Program.

Stay Informed: As an Ontario bookkeeper and Guelph accountant, I emphasize staying updated. The CRA educates industries dealing with PSBs. Adhering to guidelines ensures seamless business operation within the tax framework.

Personal Services Businesses demand a good understanding of tax laws. Reach out for specialized assistance, securing your journey toward success. You can book an online meeting with one of our tax experts at Wise Numbers and get expert advice specific to your tax situation.