A personal services business is an incorporated worker who would be an employee of the client but for the corporation, and it faces punitive tax rules and denied deductions.
If you incorporate but effectively work as an employee of a single client, using their tools, on their schedule, under their control, the CRA may treat your company as a personal services business. The consequences are severe: the corporation loses the small business deduction and most expense deductions, and pays a high combined federal-plus-provincial rate.
The classic exposure is a contractor who incorporates to serve one former employer under conditions that resemble employment. The CRA actively looks for this. Avoiding PSB status depends on the substance of the relationship, genuine independence, multiple clients, your own tools and risk, not just the contract wording.
An IT consultant incorporates but works full-time for one client, on-site, under their direction, with no other customers. The CRA assesses the company as a PSB, denying its deductions and applying the punitive rate.
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