Corporate Tax Rate Changes Impacting Personal Services Businesses
A new change has been made to the Corporate Tax Rates that applies to the income of a personal services business (PSB). Income of a PSB no longer qualifies for the federal general rate reduction of 13%. As a result, this leads to a 38% corporate tax rate for PSB income and flow through rate of 54% when the after-tax earnings are paid to the corporate shareholder as a dividend. If the shareholder had earned the income directly as an employee, the total tax burden would be only 44%.
A corporation will be considered to be carrying on a PSB where a specified shareholder (generally, a person who owns 10% or more of any class of the corporation’s shares) of the corporation performs services on behalf of the corporation, and that shareholder would reasonably be considered an employee of the customer to whom the services are rendered if the corporation did not exist (i.e. an incorporated employee). If the services are performed by a person related to a specified shareholder, the corporation will also be considered to be carrying on a PSB. For the purpose of the specified shareholder test, a person is deemed to own any shares of the company that are owned by related parties. An exception applies where the corporation employees more than five full-time employees in the business.
The issue of whether someone is an incorporated employee is a question of fact and must be reviewed on a case-by-case basis. You may be considered an incorporated employee of the client in the following situation:
- You have one or very few clients.
- Your client has a high degree of control over your activities (when, where, and how)
- You carry on the duties at that client’s place of business on a continuous basis.
- Your client provides an office and the tools of the trade.
- Your business card is in the name of the client.
- The client pays you on a regular basis. You have little or no risk of loss or opportunity for profit.
- You perform on-going services for the client and are an integral part of their business.
If you think you might be an incorporated employee, you should discuss your situation with the DMCL tax advisors. to gain an understanding of the implications of your corporation carrying on a personal services business and the options available to you.