In our last article, we spoke about what a “personal service business” (PSB) is. This time let’s look at how a corporation can help prevent being deemed a PSB.
Some seem to view incorporation as “proof” of independent contractor status. While being incorporated could conceivably be one point of evidence showing an arm’s length relationship between a contractor and employer, it isn’t proof of a business relationship in itself.
Below is a discussion of criteria that is examined by CRA and the federal tax court when examining such a question:
If you meet one of the two categories below, the CRA cannot deem you to be a PSB:
- a corporation will not be a PSB if it employs in its ‘personal service’ business more than five full time employees throughout the year; and
- the PSB rules do not apply in respect of amounts paid or payable to the corporation by an associated corporation for personal services.
Even if you don’t have five, having any employees is a help and something that the CRA considers when determining a small corporation’s status.
Another very important factor is the number of clients your company has. You want to avoid being in the situation of working only for a single client, especially in a long-term relationship. The more clients you have, the better, in terms of avoiding the PSB designation.
You also need to pay close attention to the four issues that the CRA uses as a test to determine whether a person is an employee or an independent contractor:
- how much control over the work a contractor has;
- ownership of tools;
- the chance of profit or risk of loss that a contractor is exposed to; and
- the degree of integration.
In an independent contractor relationship, the contractor decides how the work will be performed (ie: where, when and how it will be done). In an employer-employee relationship, the employer has the right to hire or fire, determine the wage or salary to be paid, and decide on the time, place and manner in which the work is to be done.
According to the Canada Revenue Agency: “When workers purchase or rent equipment or large tools that require a major investment and costly maintenance, it usually indicates that they are self-employed individuals, because they may incur losses when replacing or repairing their equipment.”
Do you have a chance of making a profit? Do you run the risk of incurring losses due to bad debts, damage to equipment or materials, or delays? Do you cover operating costs? If these three statements are true, then you are more likely to be deemed an independent contractor then an employee.
Finally, the CRA states, “Where the worker integrates the payer’s activities to his own commercial activities, a business relationship probably exists… Where the worker integrates his activities to the commercial activities of the payer, an employer-employee relationship probably exists.” It would seem to me that one obvious way of “proving” integration to your own commercial activities would be to have multiple clients.
One last piece of advice: as a contractor, to protect yourself, you should always commit your relationship with each employer/client in a contract.
Looking to simplify the complicated on personal service business? Contact our corporate team at Touchstone Law Group LLP.
Author: Jennette Vopicka
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