# PSB, or NOT?



## beans (Jan 25, 2011)

Hello all.

I have recently begun contracting (construction). The nature of my business is purely intellectual, and I am the sole service provider. I understand that if I am considered a Personal Service Business (PSB), My tax rate jumps from 11% (as a small business) to 28%.

The facts: As I have only just started, I only have the one client, and the one contract (indefinite length). I provide my own work tools. I have mild flexibility over my hours, however I am expected to follow other contract personnel schedules. I carry my own liability insurance as well as submit regular invoices.


Many in my field simply file as a small business, not as a PSB. They have not had any problems to date but are they leaving themselves open to scrutiny and possibly taxes owed (should they be audited?).

Is there grey area at all? Can I possibly be considered a small business? The long term tax benefits of being a small business seem far more beneficial than having to take out all of my business revenue as salary (as I have been counselled to do).

Trying to appeal to the masses on this one, since I have such conflicting advice.

Thanks in advance.

Beans


----------



## OhGreatGuru (May 24, 2009)

I think you are confusing corporate tax rates with personal income tax rates.


----------



## Homerhomer (Oct 18, 2010)

If you pick up more clients you will be fine, if you continue to have only one client you may be in trouble and indeed be considered PSB.


----------



## MoneyGal (Apr 24, 2009)

This is a very confusing post. 

If the OP is not incorporated, he cannot be found to have a PSB (which is a form of corporation) by CRA. 

I *think* the issue he's asking about is whether he is safe in assuming he will be treated for tax purposes as an independent contractor (whether providing services through a corporation or not), or as an employee - which is a different discussion. 

The tax rates question is another issue. 

Compensation strategies are yet another (large) issue, and play a factor in determining whether incorporation is viable in any given situation. 

Self-employed people are audited much more frequently than employees, for obvious reasons.


----------



## Homerhomer (Oct 18, 2010)

My understanding of the initial post was that OP is incorporated, if this is not correct than indeed a whole lot more needs to be explained ;-)


----------



## MoneyGal (Apr 24, 2009)

Huh. Possibly he is incorporated. I was confused by the question, "could I be considered a small business?" -- but the salary question suggests he is incorporated. Incorporation may not provide any advantage for him, though. Hard to say with so little info.


----------



## beans (Jan 25, 2011)

OH gawsh. I am sorry for the mass confusion. Maybe this will clarify things...

Here is an article with which the majority of my unease:

http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TNF/Pages/tnfc1307.htm

**Note: 
I have a limited company in AB

Admittedly I have a loose grasp on the subject matter...

I provide my own tools, everything! I invoice a headhunter.


----------



## MoneyGal (Apr 24, 2009)

OK! Let me take another crack at this then. 

Your questions: 

Are you at risk of being considered a PSB by CRA? Based on what you've told us, yes. 

Are your colleagues, who are not incorporated but instead run sole proprietorships, at risk of being audited? Yes. Are they at risk of having their deductions denied? Based on what you've told us, yes. 

The reality is that CRA can and will deny expenses/deductions if they deem, based on the facts, that the expenses/deductions are not legitimate. In the case of contractors, whether those contractors are notionally self-employed or operating through a one-person corporation, CRA may, after review, conclude that the relationship between the contractor and his or client is NOT one of self-employment (through whatever structure), but is in fact an employee-employer relationship. 

In that case, if the contractor is incorporated, CRA can deem the corporation to be a PSB. 

If the contractor is not incorporated, CRA can deem the contractor to be an employee of the contracting business. 

Are your colleagues *more* at risk than you of being audited and, if audited, being found to be employees, not self-employed? Not necessarily. Each case should be judged on its own merits. 

Should you seek professional advice w/r/t how to protect yourself from CRA review and from the risk of your corporation being deemed a PSB? Yes. 

Note that ALL of these questions are not about differential tax rates or compensation strategies. Those questions are valid, but separate from the PSB/employee/self-employed discussions.


----------

