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Accounting encyclopedia · Corporate tax

Personal services business

A personal services business (PSB) is a corporation through which an individual, called an incorporated employee, provides services that would make them an employee of the client if the corporation did not exist. A PSB cannot claim the small business deduction or the general rate reduction, pays an additional 5% tax and can deduct only limited expenses.

Sora Accounting & Tax · General information · Editorial policy
Updated · 3 min read

One worker, one client, a corporation in between

Shows an incorporated worker whose arrangement looks like employment, and the consequences branching from it: no small business deduction, an extra 5% tax and limited deductions.

Visual labels: Employee but for the firm; Rate reduction denied; Extra 5% tax; Limited expenses.

The five conditions

A corporation providing services is a PSB only if all five conditions are met. The worker provided services through a corporation. The worker, or someone related to them, is a specified shareholder, generally owning at least 10% of the shares of any class. The corporation employs five or fewer full-time employees throughout the year. The amounts received were not paid by a corporation associated with it. And the worker would reasonably be considered an employee of the payer if the corporation did not exist.

The CRA notes that incorporating is more common in some industries, including construction, trucking and transportation, and professional, scientific and technical services. Working for a single client is not one of the five conditions, and a corporation that fails any one of them is treated like any other corporation.

The factors that decide employee status

The last condition is a question of fact, decided like any employee or self-employed question. The CRA looks at control over how and when the work is done, who supplies tools and equipment, whether the worker can subcontract or hire assistants, who bears financial risk, who is responsible for investment and management, and the opportunity for profit. The facts as a whole decide, so the label in a contract does not settle it.

You cannot ask the CRA for a CPP/EI ruling on whether you would be an employee of the client without the corporation. You can ask for a ruling on whether you are an employee of your own corporation.

What changes if it is a PSB

PSB income is not eligible for the small business deduction or the general rate reduction, so it is taxed at the full federal and provincial rates, plus the extra 5% tax. The corporation may deduct only a short list of expenses: salary and wages paid to the incorporated employee, benefits and allowances provided to them, certain expenses of selling property or negotiating contracts, and legal costs of collecting amounts owing.

As an illustration, a corporation bills one client $100,000 and pays its owner $70,000 of salary. Only the salary is clearly deductible, so the remaining $30,000 of income faces the higher rates and the extra 5% rather than the lower small business rate. Ordinary business costs that another corporation could deduct may not be available.

What to discuss with your accountant

A PSB must still file a T2 return, issue T4 slips to employees and file GST/HST returns if applicable. The client should generally issue a T4A slip for the fees. The CRA has said it is reviewing PSBs, particularly in trucking, and reassessments and penalties are possible.

Bring your contracts, how you are directed in practice, your invoices and who owns the tools. Ask whether the arrangement should change before you rely on the corporation’s tax rate.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.