A considerable number of ‘Contract’ Truck Drivers are Incorporated and may be filing taxes as a small business, while CRA may classify them as Personal Services Business.
Personal Services Businesses (PSBs)
What is a personal services business in Canada?
A personal services corporation is a one-person business operating like an employee instead of an independent contractor. If you are an incorporated business, but you only have one client, the Canadian Revenue Agency may determine that you are a personal services corporation.
CRA has identified incorporated company truck drivers as Personal Services Businesses (PSBs). Trucking ownership must now issue T4As to all self-employed contractors. PSBs do not qualify for the Small Business Deduction and are taxed at the full higher corporate tax rate. Personal service corporations are required to have a December year end for the purposes of paying income tax. Mostly truck driver, IT consultant, Accountant, catering and construction will be considered as Personal Service Business.
If a corporation hires more than five full-time employees throughout the year it is not classified as a personal services business.
The Income Tax Act sets the rules for PSBs, In general, they apply if the following terms are met:
- Business Income in the corporation is from services provided by an individual on behalf of the corporation, described as an “incorporated employee.”
- The incorporated employee performing the job, or a related person, is a specified shareholder. The term specified shareholder is defined in the Income Tax Act, and generally refers to a person who (together with non-arm’s length persons) owns — directly or indirectly, at any time during the year — 10% or more of the issued shares of any class of the corporation or of any related corporation.
- Without the existence of the corporation, the incorporated employee might normally be considered as an officer or employee of the payor
- During the course of the year the corporation does not employ more than five full-time employees in the enterprise.
- The services supplied by the corporation are not being supplied to an associated corporation.
Personal Services Business – Deductions are Limited
The Income Tax Act limits the deduction of expenses of PSBs to the following allowable deductions:
- Wages, salary, and other compensation paid during the year to an incorporated employee of the corporation
- the cost of benefits or allowances supplied to the incorporated employee
- the cost of selling of property or negotiating contracts by the corporation, if the amount would have been deductible were it spent by the incorporated employee while their employment required them to spend that amount
- legal costs incurred by the corporation in collecting amounts due to it for services rendered
The amounts are only deductible by a personal services business if they are deductible by any other business
What makes a corporation a Personal service business?
- Rules vary, but in general the following apply:
- Ownership of tools
- Control over hours of work
- Who bears the risk?
- Ability to subcontract
- Ability to do other work
In Closing :
If you are a contract truck driver who provides your services mainly to one company, do not panic. But do familiarize yourself with the issue, particularly the Canada Revenue Agency’s distinction between employees and independent contractors and take what steps you can to enlarge your small company’s horizons and protect your corporate status.
In addition to reading this article that outlines how Canada Revenue Agency decides which entity is a corporation, you should look at these Canada Revenue Agency documents:
- RC4110 Employee or Self-Employed?
- Workers Engaged in Construction – Employees or Self-employed Workers?
You may also wish to consult a professional such as a tax accountant as to how best to safeguard your corporate status.
