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New CRA campaign focuses on personal services businesses: Are you ready?

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Author Bruce Ball, FCPA, FCA, CFP, Vice-president, Taxation, CPA Canada

September 6, 2022

The Canada Revenue Agency is escalating their scrutiny of personal services businesses, and the consequences for breaching these tax rules can be severe. Find out what you need to know about the CRA’s campaign.

As more individuals and sole proprietors in Canada are choosing to incorporate, it has become essential to assess if the formed corporation is operating as a PSB and how that can impact the entity’s tax situation. The CRA is taking a closer look at the personal services business (PSB) rules that apply when:

  • services are provided through a corporation, and
  • the individual doing the work would be considered an employee if they provided the services directly
Among its activities in this area, the CRA presented a webinar in February 2022 and sent stakeholder emails to educate corporations and advisers about the rules and how to comply with them.
In a stakeholder email sent in July 2022, the CRA said they would be contacting Canadian businesses from June to December 2022 to ask for documentation about their payer/payee relationships.
Taxpayer participation in the program will be voluntary, although businesses that take part will be advised to ensure they correct any errors and comply with the Income Tax Act.

The campaign seems to focus on industries that commonly hire service providers who may operate a PSB, such as trucking, IT consulting, accounting, construction and catering – all of which are named in the CRA’s webinar.

As more CRA activity on this front is possible,  this blog provides an overview of:

  • the relevant PSB rules to consider
  • some leading practices to consider for taxpayers that deliver services through a corporation

OVERVIEW

Rather than hiring employees directly, many taxpayers retain non-employees to provide services, whether to fill a short-term need, obtain specific expertise or otherwise fill a role that is not suited to a full-time position.

These situations carry significant income tax risk, and that risk depends on whether an individual or corporation is providing the services.

When the service provider is an individual, the key income tax issue is whether the individual is employed or self-employed. If the individual is self-employed but the CRA decides that they are in fact an employee, then the individual’s expense deductions may be denied. The payer may also be on the hook for income tax, Canada Pension Plan and Employment Insurance withholdings, as well as penalties for failing to make these withholdings. Both the payer and payee bear tax risk in these situations.

But where the payer engages a corporation to provide services, the income tax risks associated with the proper calculation and payment of tax rest mainly with the service provider. Assuming the provider is a Canadian-controlled private corporation, the tax rules require a determination as to whether the income is:
  • income from an active business that is eligible for the small business deduction, or
  • income from a PSB
If the payee treats the service income as eligible for small business tax rates but the CRA characterizes the income as earned from a PSB, a significant tax liability could arise for the payee. The payer is in no way affected by the income determination, however, which is one reason why many payers prefer to deal with service providers that are incorporated.
(Note that different rules apply when the corporation provides services to an associated corporation.)

WHAT’S NEXT?

With the CRA intensifying its outreach in this area and contacting taxpayers to voluntarily take part in an education program, we assume that other CRA activities in the future are possible. If you or your clients earn service income in a corporation, be sure to review whether the PSB rules apply and what action you may need to take. We will continue to monitor the situation — watch for updates as more information becomes available.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Alvarez CPA Inc.

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