Personal Services Business

My employer has asked me if I could start invoicing him as a self employed contractor. I was told by my employer that I could write off all my expenses including a portion of my home and most importantly, if I incorporate, I’ll only pay tax at 15.5% on the income is remaining?

One of the main advantages to being incorporated is the ability to access the small business deduction, which let’s the corporation pay tax at the low rate (in Ontario) of 15.5%. However, since 2011, CRA has deemed that a personal services business (PSB) cannot access the small business deduction and even more importantly, limits the eligible deductions from your earned income.

The only eligible deduction for the corporation will be any salary and benefits paid to the incorporated employee. If the incorporated employee is receiving commissions, then additional expenses are available. However, income splitting with your spouse, paying for office supplies and your cell phone are not.

So, you may ask, how do I determine if I have a personal services business or not? CRA bases their decisions on the tests below;

Control test: A lack of control over how work is done is evidence that there is an employer-employee relationship – e.g. the payer determines how the work should be done, what work should be done and provides training. In a business relationship, the contractor would work independently and accept or refuse work at his/her own discretion.

Tool test: Contractors supply their own tools. Tools include instruments, computers, vehicles and any other items that the worker uses to perform their tasks.

Subcontractor test: The ability to hire assistants or contract work out is evidence that there is a business relationship. Can you send in someone else to do the work, while you handle another client?

Risk/Opportunity test: Risk of loss and opportunity for profit are indicators that there is a business relationship.

Integration test: This test examines whether the payer’s activities are incorporated into the worker’s business or whether the worker is integrated into the payer’s activities.

So, if you’ve been asked by employer to change your employments status, please contact us so we can provide you with the best solution

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The incorporated employee