Personal Service Corporation (PSC) Risk

Personal Service Corporation (PSC) and Personal Service Business (PSB)

Today, I’d like to address the issue of the “personal service corporation”, commonly known as PSC, and the risk that it’s normally associated with in regards to independent contracting. This may also apply to other independent professionals like consultants and project managers. I’d also like to tell you about what CA4IT has done to assist and protect our clients regarding this matter.

Independent contractors benefit from the following income tax advantages:

ONE: income retained in the corporation qualifies for the small business deduction resulting in a low corporate income tax rate of approximately 15.5%,
TWO: overall income tax can be lowered using income splitting to pay reasonable salaries and dividends to family members, and
THREE: the corporation is entitled to deduct a fairly broad variety of business expenses that were incurred in order to earn business income.

On the other hand, employees, are subject to the following income tax disadvantages:
ONE: they are subject to the highest personal marginal income tax rates of 40% to 50%,
TWO: they have no possibility of lowering their overall income tax using income splitting, and
THREE: they have extremely limited deductibility of expenses incurred in order to earn employment income.

There is therefore a considerable advantage for highly paid employees to convert their employment income into independent contractor corporate business income.  Apart from any restrictions to the contrary, any and all highly paid employees can simply resign from their employment, incorporate a company and offer the same personal services to their former employer through their newly incorporated company.

This, however, results in a significant loss of tax revenue for the government. Let me explain:
In order to prevent this from occurring, the Canadian government has enacted certain provisions that restrict the low corporate income tax rate to “an active business carried on by a corporation” – which actually means “any business carried on by the corporation other than…a personal services business”.  So, according to Revenue Canada, a corporation that conducts a personal services business is generally referred to as a personal services corporation, or PSC. That doesn’t sound like good news, does it? But hold on, because I’ve got good news for you!
CA4IT has been a pioneer among chartered accounting firms with respect to the PSC income tax issue.  In 1984, when CA4IT first started, the global trend towards independent contractor work relationships, including the IT industry, was in its earliest stages.  Many of CA4IT’s first incorporated IT contractor clients came to CA4IT after being turned away by other chartered accounting firms who believed that all such small corporate clients were definitely PSC’s. Well, we at CA4IT believed otherwise: After the Canada Revenue Agency, or CRA, lost their landmark “Wiebe Door” case in 1986, it’s become generally accepted that CA4IT clients are not PSC’s. Occasionally, the CRA will still challenge us on one of our clients not being a PSC.  To ensure each and every one of our clients are protected, CA4IT has developed a 72 page proprietary document that outlines exactly why CA4IT clients are not PSC corporations.  Furthermore, we offer our clients true piece of mind by protecting them with our audit representation protection. You can see more about that in my earlier video entitled, “Audit Protection”. If you have any other questions about the PSC risk or self-incorporation, feel free to contact me directly.

Andrew Wall

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