31 August 2026
Personal Services Business (PSB) Rules in Canada
A personal services business is not a regular small-business company. If CRA treats your corporation as a PSB, you lose the small business deduction and the general rate reduction, face an extra 5% federal tax, and can deduct only a short list of expenses. The result is a much higher corporate tax bill than most incorporated consultants expect. This guide explains the CRA tests, the tax consequences, and how Vancouver owner-managers should respond. Rules and figures below are current as of August 2026; confirm them for your year before you file.
Incorporation does not automatically save tax
CRA looks through the corporation and asks a simple question: if the company did not exist, would the person doing the work reasonably be an employee of the client? If the answer is yes, and the other statutory conditions are met, the corporation is carrying on a personal services business. That status changes how the T2 is filed and how much tax the company pays.
What is a personal services business in Canada?
A personal services business is a corporation that provides services through an “incorporated employee.” That person, or someone related to them, is a specified shareholder, and they would reasonably be considered an employee of the client if the corporation were ignored. CRA uses this definition from subsection 125(7) of the Income Tax Act. The agency has published clarified PSB guidance and has been running educational outreach because many corporations claim the small business deduction when they are not entitled to it.
PSBs are common where a client asks a worker to incorporate so the client can treat the arrangement as a business-to-business contract. Construction, trucking, transportation, warehousing, and professional, scientific, and technical services are the industries CRA specifically flags. A Vancouver IT contractor, site supervisor, or owner-operator driver working mainly for one company is a typical fact pattern.
Who do the personal services business rules apply to?
CRA says a corporation is carrying on a PSB only if all five conditions are met. If any one condition fails, the corporation is not a PSB for that income.
1. Services through a corporation
The worker provides the services through a corporation, not as a sole proprietor or employee of the client.
2. Specified shareholder
The worker, or a related person, owns at least 10% of any class of shares of the corporation or a related corporation, directly or indirectly.
3. Five or fewer full-time employees
The corporation employs five full-time employees or fewer throughout the year. A full-time employee works a full business day on each working day, subject to normal vacation or illness.
4. Income is not from an associated corporation
The amounts received for the services were not paid by a corporation that was associated with the worker’s corporation in the year.
The fifth condition is the one that usually decides the file: if the corporation did not exist, would the worker reasonably be an employee of the payer? CRA says this is a question of fact, analyzed the same way as employee versus self-employed status. Control over how the work is done, ownership of tools, chance of profit and risk of loss, and how integrated the worker is into the client’s business all matter. You cannot ask CRA for a CPP/EI ruling on that hypothetical employee test. You can ask for a ruling on whether the worker is an employee of the PSB itself.
How is personal services business income taxed?
PSB income is not eligible for the small business deduction or the general tax rate reduction. It is taxed at the full federal corporate rate, plus an additional 5% federal tax on PSB income, plus provincial tax. On a T2, CRA expects PSB income on line 520 of Schedule 7, line 432 of the T2, and line 555 for the extra 5% tax. The corporation does not claim the SBD on line 430 for that income.
Rounded 2026 combined rates for a CCPC in British Columbia are the figures most Vancouver owners need. Confirm the exact rates for your year and province before you plan.
| Type of income | Combined rate | Tax on $100,000 |
|---|---|---|
| Active income eligible for the SBD | ~11% | ~$11,000 |
| Active income at the general rate | ~27% | ~$27,000 |
| Personal services business income | ~45% | ~$45,000 |
Federal PSB tax is the full federal rate (generally 28% after the provincial abatement, without the general rate reduction) plus 5%. BC’s general provincial rate is 12%. Combined, that is about 45%. These are rounded planning figures, current as of August 2026.
What expenses can a PSB deduct?
Paragraph 18(1)(p) of the Income Tax Act sharply limits deductions. CRA says a PSB may deduct only:
A Vancouver example with numbers
Sam incorporates a BC company and invoices one construction client $140,000 a year. Sam is the only worker, owns all the shares, uses the client’s equipment, and follows the client’s schedule. The corporation pays Sam a $70,000 salary and claims $18,000 of home office, truck, and phone costs. If CRA classifies the company as a PSB, those $18,000 of expenses are generally not deductible. The remaining profit is taxed as PSB income, not as small-business income. The corporation must also report the salary on a T4 and run payroll, including where the employee is the specified shareholder.
If the same $70,000 of corporate profit were eligible small-business income, BC tax would be about $7,700. As PSB income, tax is about $31,500 before looking at the denied expenses. That gap, plus interest, is why CRA’s PSB pilot found so many corporations had underpaid. In that outreach work, a large share of potential PSBs had claimed the SBD they were not entitled to, and most confirmed PSBs had not reported the extra 5% tax.
How to decide if your corporation is at risk
Map the five conditions
Confirm share ownership, employee count, the payer, and whether the work is done through the corporation. All five conditions must be present.
Test the employment facts
Look at control, tools, risk, and integration the way CRA would if the corporation did not exist. One dominant client is a warning sign, not an automatic PSB.
File the T2 the right way
If you are a PSB, do not claim the SBD on that income. Report PSB income on the T2 lines CRA specifies and limit deductions to the allowed list.
Correct old filings if needed
CRA points corporations that filed incorrectly to the Voluntary Disclosures Program or a T2 adjustment. Get advice before you amend, because interest can already be running.
Common PSB mistakes
Assuming incorporation equals SBD
A client who “requires” a corporation does not decide your tax rate. CRA looks at the working relationship, not the invoice letterhead.
Claiming ordinary operating costs
Vehicle, home office, meals, and phone bills that would be fine for a regular CCPC are usually denied in a PSB.
Skipping payroll on the owner
If the corporation pays the incorporated employee, it generally needs a payroll account and T4 slips, even when the employee is the shareholder.
Ignoring GST/HST
A PSB still follows normal GST/HST registration rules, including the $30,000 small-supplier threshold over four calendar quarters.
Incorporation can still be the right legal structure for liability, contracts, or future growth. The mistake is treating every incorporated consultant as if they automatically get the corporate tax rates that apply to active small-business income. If you are deciding whether to incorporate at all, start with whether incorporation makes sense in BC and incorporation and business structure advice, then test PSB risk before you rely on the small business rate.
When professional CPA advice becomes useful
Get a CPA involved when one client dominates your billings, a hiring company told you to incorporate to “save tax,” you have already claimed the SBD on what may be PSB income, or you are changing from employment to a corporation mid-year. Those files need a fact-specific review, the right T2 presentation, and a plan for salary versus what little else a PSB can deduct. That is core corporate tax planning and T2 preparation work, not a generic incorporation checklist.
Frequently asked questions
Worried CRA could treat your company as a personal services business?
J. Wang Chartered Professional Accountant reviews the working relationship, the five CRA conditions, and how personal services business rules affect your T2, payroll, and compensation plan.
