Personal Services Business
If you are a self employed small business owner, you need to protect yourself from being considered a personal services business by Canada’s Revenue Agency (CRA).
A personal services business will endure hefty tax expenses, as it is not eligible for the significant tax reduction that small businesses receive. CA4IT offers small business consultation and tax preparation services to protect small businesses and maximize their tax savings.
Personal services businesses are extremely limited in the expenses they can deduct for tax purposes. The only deductible expenses are employee wages and salary, as opposed to small business deductions which also include employee training, transportation and advertising deductions. In addition, personal services businesses are subject to pay the corporate tax rate in full, they do not receive the lowered corporate tax rate to which small businesses are entitled to.
A personal services business is small scale operation that provides services to a corporation in which the individual providing the service could be considered an employee of the corporation for which is receiving the service. Those at risk for personal services business classification include independent consultants with only one “client” (especially if they are in a long term contract) and corporations with under 5 full-time employees.
It is vital to protect your business from being considered a personal service corporation; if you file your taxes claiming the Small Business Deduction and business expenses and are found to be a personal services business, you will be subject to large tax penalties for following incorrect filing procedures. Fortunately, there are simple preventative measures small business owners can take to make sure they receive small business tax benefits from the CRA:
- Compose a clearly worded contract for each client that establishes your services, and follow through with each working relationship.
- Have a client base that is as diverse as possible. Having a single client as the source of 100% of your revenue can put you at significant risk for being considered a personal services business.
- Protect your financial assets through various measures, including putting assets under the name of a non-working spouse.
If your small business is faced with a tax audit with the Canada Revenue Agency, we can help. With over 25 years of service, we have never lost a major tax audit case. Our trusted expertise helps save our small business clients from unnecessary tax expenses; we enable you to make the most out of your revenue!