A personal services business (PSB) is a corporation that, in the CRA’s eyes, is really just a wrapper around an employee. If you’d be considered an employee of your client if you weren’t incorporated, and your corporation has fewer than six full-time employees, your income can be treated as PSB income. That means no small business deduction, a combined corporate tax rate of roughly 41% to 45% depending on your province, and almost no expense deductions.
This matters most to incorporated IT contractors, consultants, engineers, project managers, truck drivers and trades who work for one main client. Here’s how the rules work and what you can do about them.
On this page
- What Is a Personal Services Business? A Plain Answer
- How the CRA Decides If You’re an “Incorporated Employee”
- The Two Exceptions: Five or More Full-Time Employees and Services to an Associated Corporation
- What PSB Status Costs You: Tax Rates and Denied Deductions (with Numbers)
- How to Reduce Your PSB Risk: Contracts, Multiple Clients and Business Presence
- Already Reassessed as a PSB? Your Options
- FAQ: Personal Services Business
- Get a PSB Risk Review for Your Corporation
What Is a Personal Services Business? A Plain Answer
You incorporate, sign a contract between your corporation and a client, and invoice through the corporation. Normally that income is “active business income” and qualifies for the low small business tax rate (around 11% in BC and Alberta).
The PSB rules ask one question: if your corporation didn’t exist, would you be an employee of the client? If the answer is yes, the CRA calls you an “incorporated employee” and your corporation a personal services business.
Your corporation is a PSB when:
- It provides services to another business,
- The person doing the work (or someone related to them) owns at least 10% of the corporation’s shares, and
- That person would reasonably be considered an employee of the client if the corporation weren’t there.
How the CRA Decides If You’re an “Incorporated Employee”
The CRA uses the same tests it uses to decide employee vs. contractor. No single factor decides it. They look at the whole relationship.
| Factor | Looks like an employee | Looks like a business |
| Control | Client sets your hours, supervises your work, tells you how to do it | You decide how, when and where the work gets done |
| Tools and equipment | Client provides laptop, desk, email, software | You use your own equipment and pay for it |
| Subcontracting / helpers | You must do the work personally | You can hire or subcontract help |
| Financial risk | No real expenses, paid regardless of results | You carry costs before you get paid, you can lose money |
| Chance of profit | Paid by the hour, no way to earn more by working smarter | You can price by project and grow your margin |
| Clients | One client, often for years | Several clients, marketing to new ones |
| Integration | You have a company title, business card, attend staff meetings | You’re clearly an outside vendor |
| Intention | Contract reads like a job description | Contract clearly sets up a business-to-business relationship |
The CRA has said it sees a lot of PSBs in trucking, professional, scientific and technical services (think IT and engineering), and construction.
The Two Exceptions: Five or More Full-Time Employees and Services to an Associated Corporation
Even if you look like an incorporated employee, your corporation is not a PSB if:
- It employs more than five full-time employees throughout the year. Six or more full-time people for the whole year gets you out. Owners count only if they work full-time in the business.
- The services are provided to an associated corporation. For example, your management company billing your own operating company.
What PSB Status Costs You: Tax Rates and Denied Deductions (with Numbers)
Corporate tax rates on PSB income (2026, approximate):
| Province | Normal small business rate | PSB rate |
| British Columbia | ~11% | ~45% |
| Alberta | ~11% | ~41% |
| Ontario | ~12.2% | ~44.5% |
The federal PSB rate is 33%: the general 15% rate, without the general rate reduction, plus an extra 5%. Your province adds its general rate on top.
Deductions: A PSB can only deduct:
- Salary, wages and benefits paid to the incorporated employee
- Legal costs to collect amounts owed to the corporation
- Certain expenses that the employee could have deducted if they were an employee
Everything else is denied: rent, car, phone, accounting fees, home office, software.
Example: Ali’s corporation billed $180,000 to one bank in 2026 and had $15,000 of expenses.
| Treated as active business | Reassessed as PSB | |
| Taxable income | $165,000 | $180,000 (expenses denied) |
| Corporate tax rate (BC) | ~11% | ~45% |
| Corporate tax | ~$18,150 | ~$81,000 |
| Extra tax | ~$62,850, plus interest and possible penalties |
And because it’s a reassessment, the CRA can go back several years.
How to Reduce Your PSB Risk: Contracts, Multiple Clients and Business Presence
There’s no single fix, but these move the needle:
- Get more than one client. Even a smaller second contract shows you’re running a business.
- Write a proper contract. It should describe deliverables and a business relationship, not hours and supervision. Avoid “employee-like” terms such as vacation, benefits, or reporting to a manager.
- Use your own tools. Your own laptop, software licences, phone and business email.
- Show financial risk. Carry your own insurance, invest in equipment, price fixed-fee projects where you can lose money.
- Have a business presence. Website, business name, GST/HST registration, marketing, invoices with your corporate details.
- Keep the right to subcontract, and actually use it when it makes sense.
- Pay yourself a salary. Salary paid to you is deductible even in a PSB, which reduces the amount exposed to the 41% to 45% rate.
- Consider a CPP/EI ruling. You can ask the CRA for a formal ruling on whether the relationship is employment.
Already Reassessed as a PSB? Your Options
- Don’t ignore the reassessment. You have 90 days from the date on the notice to file a Notice of Objection.
- Gather evidence: contracts, invoices to other clients, proof of your own equipment, insurance, marketing, correspondence showing you controlled the work.
- Check if an exception applies, especially the more-than-five-employees rule.
- Look at the salary angle. Salary paid to the incorporated employee during the year is deductible and can reduce the damage.
- Plan the next few years. Change the contract, add clients, or consider whether the corporation still makes sense.
FAQ: Personal Services Business
Does the PSB rule apply if I only have one client?
One client doesn’t automatically make you a PSB, but it’s one of the biggest red flags. The CRA looks at the full picture.
Is a PSB the same as being “deemed an employee” by the CRA?
Close, but not the same. If you’re deemed an employee, the CRA can go after your client for payroll deductions. PSB rules tax your corporation more heavily instead.
Can I avoid the PSB rules by paying myself all salary?
It helps. Salary paid to you is deductible, so less income is left in the corporation at the PSB rate. You’ll pay personal tax on the salary instead.
Does the PSB rule affect dividends I take out?
PSB income is taxed at the general corporate rate, so dividends paid from it are generally eligible dividends. Even so, the total tax is usually far higher than if you’d just been an employee.
Do the rules apply to my holding company?
Not if the services are provided to an associated corporation, like your own operating company.
How far back can the CRA go?
Normally three years from the date of the original assessment for a CCPC, and longer if there’s misrepresentation.
Get a PSB Risk Review for Your Corporation
