What is a Personal Service Corporation

Taxation advantages are 1 of the primary reasons individuals incorporate their business, simply if the CRA classifies your business as a "Personal Service Corporation" information technology may set y'all back. In a previous article , we outlined the benefits and drawbacks of incorporating your small-scale business. Incorporating your business organization non but saves coin during taxation flavour just also protects your personal assets and reduces your liability. Still, as a 1-person company, the ramifications of incorporating are huge.

A Personal Service Corporation tax proclamation will crusade you to lose your tax deductions and you lot may even be required to pay up for tax deductions from previous years.

What is a Personal Service Corporation?

Corporations are treated as a separate entity from the business owner. If you declare your business equally a Personal Services Corporation, you lot will non be considered self-employed, but rather an incorporated employee (an individual working on behalf of a corporation). The relationship between the visitor and the incorporated employee needs to exist distinctly an independent contractor in gild to not utilize.

Personal Service Corporations provide personal services to individuals and groups. An incorporated business concern that provides services that an employee of the company would usually perform is considered a Personal Service Corporation and the individual, an "incorporated employee".

How does a Personal Service Corporation Work?

With boundaries and changing work practices, freelancers and independent contractors run the risk of resembling an employer-employee. If your business is incorporated and you operate as an independent contractor, the business you are hired by doesn't need to pay employee revenue enhancement.

Am I an employee or an independent contractor?

To determine if you are an employee or an contained contract, the Canada Revenue Agency considers the following factors:

  • Do you command your hours and schedule?
  • Practise you control the work?
  • Do you own the tools used for your chore?
  • Are you lot responsible for any financial risk in your contract?

For small businesses with no big plans to expand, a sole proprietorship may be a meliorate pick, despite fewer taxation benefits and protection.

How to Avoid Being Alleged a Personal Service Corporation

In good faith, nosotros cannot provide a pros and cons list because at that place is significantly more disadvantages to existence classified every bit a Personal Service Corporation past the CRA. Fewer deductions, more than tax, and tax penalties are the chief disadvantages. Here is how to avoid beingness classified every bit a Personal Service Corporation:

  1. Rent more than than five full-time employees throughout the year. This pick isn't e'er the most feasible, especially for small business concern owners.
  2. Provide services to acquaintance corporation

Do I all the same receive deductions?

Unlike other corporations, personal service businesses do not receive small business deductions and generate rate reductions. They are fully taxed federally and provincially on all their taxable income. In addition, at that place is another 5% taxation on their taxable income.

A personal service business cannot write off as many expenses either. Some items they cannot deduct include:

  • Travel expenses
  • Phone bills
  • Function supplies
  • Meals

They can only deduct:

  • A salary/wage/benefit that is paid to the incorporated employee(s)
  • Legal expenses for collecting amounts owing

How are Personal Service Corporations Taxed?

A personal service corporation pays tax at the full corporate. They are taxed by multiplying taxable income by 21%. In British Columbia , the total tax rate for a corporate business is over 30%. For high-earning professionals with a C-Corp or Personal Service Corporation, the structure allows employees to leave some of their income in the corporation to be taxed at a lower corporate charge per unit. Even though a Personal Service Corporation has less relief with deductions due to the classification, employees and business organization owners can nonetheless brand utilize of tax-free fringe benefits such as health and dental insurance, medical expenses reimbursement, and instruction assistance.

Need help with taxes?

If your business is a Personal Service Corporation, you however demand to manage your finances and pay taxes. To ensure, you do not get in trouble with the Canada Acquirement Agency (CRA), it is important that you have actress intendance to track where your money goes.

At Soleimani Accounting, we specialize in providing professional financial services for pocket-sized businesses and corporations. From bookkeeping and accounting to tax, nosotros are here to aid your business concern thrive through sound financial communication and assistance. Get in touch to volume a free xxx-infinitesimal consultation.