Category : blog
Many consultants have the option of forming a corporation and take advantage of lower corporate tax rates compared to the highest individual tax rates. Effective year ends beginning after October 31, 2011, CRA has been reviewing as to whether an individual who is deemed to be an employee has formed a corporation for the purpose of simply taking advantage of the lower tax rate. The implications can be quite harsh as the small business deduction (for small businesses earning up to $500K of income) will be denied, no deductions other than salary expenses will be allowed, and CRA may also assess the individual’s income resulting in a higher tax rate. The business will no longer be able to deduct office expenses, auto expenses and meals and entertainment expenses. Considerations of determining whether a business is a PSB:
- Without the ownership of a corporation, would the individual be regarded as an employee of the business to which he/she is performing the duties?
- The individual owns more than 10% of the share of the business?
- The number of clients the business has?
- Where the work is performed (at the client’s premises or at home)?
- Does the client supply you with a business card?
- Does the individual’s name and contact information appear in the client’s phone directory?
- Does the client provide the tools for the individual to complete his/her job?
- Can the individual complete the work according to his/her timelines or are they governed by the hours of work of the client?
- Who takes on the risk of the work being performed?
If you are an ‘incorporated employee’ or a personal service business corporation, speak to a professional who can assist you with planning.
Let me know if you have any questions on Personal Service Businesses or any other accounting, tax or Canada Revenue Agency related questions. I can be reached at firstname.lastname@example.org or 905-629-7720
Ali Raza Jaffer, CPA, CGA, MBA, BComm
President, AR Jaffer Professional Corporation
Chartered Professional Accountant
(T) 905-629-7720 (F) 905-629-1947