Personal Services Business - YouTube

Hello and welcome to the Personal Services Business webinar.

I'm Matthew, your host for today.

For today, please use the question box

to post your questions related to Personal Services Business.

We'll answer as many as we can during the webinar.

For any other tax-related questions,

we invite you to call the business inquiries line

at 1-800-959-5525.

Let's get started.

Today we'll talk about the definition of Personal Services Business or PSB,

the different tax deductions, rates, and eligible business expenses,

filing obligations and deadlines,

filing requirements,

requesting a CPP/EI ruling,

employer-employee relationship,

correcting tax returns.

In some industries such as the following,

it is a more common practice for hiring companies to require individuals

to incorporate in order to provide services:

trucking, IT consultants, accountants, construction, or catering.

If you register yourself as a corporation to perform services for a hiring business,

you may be considered to be operating a PSB.

This structure is sometimes referred to as an incorporated employee.

The CRA might consider your corporation a personal services business or PSB

if you, as the incorporated employee

performing services or any person-related to you

is a specified shareholder of your corporation;

if your corporation did not exist, you, as the incorporated employee,

would be considered an employee of the hiring business

receiving your services;

your corporation does not employ more than five full-time employees

throughout the tax year;

your corporation's income is from services performed by you

as the incorporated employee on behalf of your corporation.

Note that a specified shareholder

is a taxpayer who owns, directly or indirectly,

at any time in the year

at least 10 percent of the issued shares of any class of capital stock,

of the corporation or a related corporation.

In other words, an individual who chooses to incorporate their business

in order to provide services for one other company

might be considered to be operating a PSB.

In this case, the company receiving the services

would be considered the payer,

a person or company who pays the worker or corporation for their services.

A PSB exists

where the individual would be considered to be an employee of the payer

if it were not for the existence of the corporation.

This individual is sometimes referred to as an incorporated employee.

Let's look at an example.

John is looking for a job.

An Ontario-based trucking company, ABC Trucking,

offers him a 12-month contract position with full-time hours.

The contract comes with the stipulation

that John perform his services through a Corporation.

John incorporates his business 123 Ontario, Inc.,

for which he is the only shareholder and only employee.

123 Ontario, Inc.'s only client is ABC Trucking.

123 Ontario Inc. bills ABC Trucking for the services it performs,

and it receives payment from ABC Trucking for those services.

123 Ontario Inc. either keeps the funds in the corporation

or disperses them to John.

In this example, 123 Ontario, Inc.

meets the conditions outlined in the Income Tax Act

to be considered a personal services business.

John is a specified shareholder of 123 Ontario, Inc.

John performs the work of an ABC Trucking employee

using their trucks

and would, therefore, be considered an employee of ABC Trucking

had he not incorporated as 123 Ontario, Inc.

John is the only employee of 123 Ontario Inc.

123 Ontario, Inc.'s sole income is from services performed by John,

an incorporated employee, for ABC Trucking.

If you are considered to be operating a personal services business by the CRA,

your tax obligations are different from other corporations.

The federal corporate tax rate is 38 percent

and after the federal abatement of 10 percent is reduced to 28 percent.

PSBs are not eligible for the small business deduction

or the general tax rate reduction.

Effective for the 2016 tax year and beyond,

PSBs are subject to an additional tax of five percent

bringing their total federal corporate tax rate to 33 percent.

In addition to the federal tax,

PSBs are also subject to provincial or territorial corporate tax rates.

For example, in Ontario,

the current provincial corporate tax rate is 11.5%.

Therefore, a PSB in Ontario

will be subject to a total corporate tax rate of 44.5%.

This includes both the 33% federal corporate tax rate

and the 11.5% provincial corporate tax rate.

Furthermore, PSBs can only deduct specific business expenses from income,

such as the salary and wages

the corporation pays to its incorporated employee,

any benefit or allowance the corporation provides to its incorporated employee,

legal expenses the corporation incurs for collecting amounts owing to it.

Amounts paid by one business to another business

for services provided is considered as income,

not salary or wages,

and therefore, the amounts are not subject to statutory payroll deductions.

This means that you do not withhold Income tax, CPP, and EI on these amounts.

However, at year end,

the corporation will be required to pay the CRA,

Corporate Income Tax on all income earned

by the corporate tax filing and payment deadlines.

Like other corporations,

a PSB is required to file a T2 Corporation Income Tax Return

and must file its return no later than six months

after the end of each tax year.

The tax year of a Corporation is its fiscal period.

When the corporation's tax year ends on the last day of a month,

the return must be filed by the last day of the sixth month

after the end of the tax year.

When the last day of the tax year is not the last day of a month,

the return must be filed by the same day of the sixth month

after the end of the tax year.

For example, if your tax year ends March 31st,

your filing due date is September 30.

If your tax year ends August 31st, your filing due date is February 28th.

If your tax year ends September 23rd, your filing due date is March 23rd.

When operating a PSB,

if you pay salary and wages from your corporation,

you will have to withhold income tax, CPP, and in some cases, EI.

These amounts must be remitted to the CRA

along with the employer's share by the due date.

At the end of the year,

the corporation will have to report the income paid to employees

and the deductions on a T4 slip, statement of remuneration paid.

Employers must provide employees with a T4 slip

by the end of February each year.

For more information, see Guide RC4120 Employer's Guide:

Filing the T4 Slip and Summary on the canada.ca website.

The corporation has to register for a payroll program account

before the first remittance due date.

The first remittance due date is the 15th day of the month

following the month

in which the corporation began withholding deductions

from the employee's pay,

unless the CRA tells the corporation to remit using a different frequency.

If a worker or a payer is not sure of a worker's employment status,

either party can ask for a ruling to have the status evaluated

after the parties have entered into a contract

since it is based on the facts of the working relationship.

A ruling indicates whether a worker is an employee or is self-employed

and whether that worker's employment is pensionable and/or insurable.

A worker or an employer can ask for a ruling

before June 30th of the year following the year

to which the question relates.

For example, if the employment took place in 2016,

the ruling request has to be made before June 30th, 2017.

If you are a payer and are registered on My Business Account,

you can use the Request a CPP/EI Rulings service

in My Business Account.

If you are a payer or a worker and are registered on My Account,

you can use the Request a CPP/EI Ruling service in My Account.

An authorized representative for the payer

can also ask for a ruling online through Represent a Client.

A payer or a worker can ask for a ruling

by sending a letter or a filled out Form CPT1,

Request for a CPP/EI Ruling — Employee or Self Employed

to their tax services office.

You can get this form under "Forms and publications" on the CRA website

or by calling 1-800-959-5525.

It is important to note that workers and payers

are free to set their affairs as they wish,

but they must make sure that whatever status they have chosen

is supported by the actual facts of the working relationship.

If you are not sure whether the workers you employ are considered an employee,

you can refer to these indicators

to assess the facts surrounding your relationship.

A worker is considered an employee

when the relationship is one of subordination.

The payer will often direct, scrutinize, and effectively control

many elements of how and when the work is carried out.

The payer controls the worker with respect to both the results of the work

and the method used to do the work.

The payer chooses and controls the method and amount of pay.

Salary negotiations may still take place in an employer-employee relationship.

The payer decides what jobs the worker will do.

The payer chooses to listen to the worker's suggestions

but has the final word.

The worker requires permission to work for other payers

while working for this payer.

Where the schedule is irregular,

priority on the worker's time is an indication of control over the worker.

The worker receives training or direction from the payer on how to do the work.

In an employer-employee relationship,

the payer is considered an employer and the worker an employee.

If you believe you might be operating a personal services business

and would like to correct the tax returns you previously filed,

you can contact the CRA's voluntary disclosure program

to determine if you meet the eligibility requirements

and submit an application.

Today, we covered these issues relating to personal services business.

What is a personal services business?

Who is considered to be operating a personal services business?

We went over the PSB's tax rates.

We talked about the types of expenses a PSB can or cannot claim.

We also talked about the filing obligations,

requirements, and deadlines.

How one can request a ruling and define the employer-employee relationship,

and finished with how you can correct a previously filed tax return?

Tax administration is as complex as life itself.

If the content today doesn't quite fit your situation,

please visit our website.

Visit canada.ca/cra-liaison-officer

to get free tax help from a liaison officer.

Call CRA's business inquiries line at 1-800-959-5525.

You can also go to canada.ca/cra-videos

where you'll find all of our business webinars.

We've come to the end of our webinar.

Please click on the survey icon in the toolbar

at the top of the screen

to fill out the evaluation form

for this webinar webinar.

Thanks for joining me today.

I hope it's been helpful.

Stay tuned for more webinars in the coming months.

Goodbye.