- Most of small corporations these days are one share holder companies who are working as sub-contractors and providing services to one client only.
- This type of set is becoming very dangerous from tax point of view if your corporation is determined as PERSONAL SERVICES CORPORATION by Canada Revenue Agency.
- If you provide services on behalf of your corporation to other corporation, you may be considered as an employee of the corporation to who you provide services and you can lose tax deferral advantage.
- Changes for personal services businesses are included in Bill C-48. This bill will become a law soon if passed.
- A personal services business is not eligible for small business deduction. It is also not allowed having any deductions for many expenses like training employees, accounting and legal fee, supplies or advertising.
- A personal services business is not able to claim $500,000 as small business deduction. This means an average tax rate of 38% will apply to income of corporation.
- Canada Revenue Agency can examine business records from previous years and can penalize you with huge amounts as tax bill + penalties and interest because you got it wrong in determining the structure of your business.
What can you do?
- Avoid working for a single client.
- Have employees in your corporation.
- Take out all corporate income as salary.