A personal services business is a corporation the CRA treats as a disguised employment relationship, typically an incorporated contractor providing services to a single client, resulting in higher corporate tax and severely restricted deductions.
If services are provided primarily to one client through a corporation, and the relationship would reasonably be considered employment if the corporation did not exist, the CRA may classify the corporation as a personal services business. The consequences are significant: the Small Business Deduction is unavailable, most ordinary business deductions are denied, and income is taxed at a high corporate rate.
The determination is fact-specific and turns on control, integration, economic risk, and exclusivity. Contractors who incorporate to achieve tax savings but work exclusively for one client on terms that resemble employment are the primary focus. This is not a theoretical risk. The CRA actively audits personal services business arrangements, and reassessments can extend back multiple years.
See also: Active Business Income · Canadian-Controlled Private Corporation (CCPC) · Small Business Deduction (SBD)If a corporate structure resembles employment from the outside, the CRA will treat it accordingly. See how Wefinx approaches tax planning.