CRA Has Been Sending PSB Notices To Independent Contractors

Recently, the Canada Revenue Agency (CRA) has been sending out letters to independent contractors, suggesting that their operations might meet the criteria of Personal Services Businesses (PSBs). This implies that the CRA suspects that, in the absence of their corporations, these contractors would essentially be employees of the firms to which they provide services. Being classified as a PSB carries significant tax implications, notably the exclusion from benefits like the general tax rate reduction and the small business deduction that are available to other businesses. You don’t need to concede to the PSB classification simply based on the CRA’s initial assessment. This blog aims to shed light on effective strategies to prevent or contest a PSB classification by the CRA.

Have You Received This Letter? We Can Help!

If you’ve received this letter then don’t worry, we are here to help! With over four decades of experience, CPA4IT has been helping independent contractors avoid the Personal Service Business reclassification. We have never lost a major tax audit case over 40 years of service! Our experts are equipped the necessary knowledge of tax law and court cases to defend your rights as an independent contractor. If you would like to learn more about how we can help, book a FREE consultation with one of experts today!

What Does The CRA Letter Say?

The CRA letter informs independent contractors that they might meet the criteria for classification as Personal Services Businesses (PSBs) following a review of their T2 corporation income tax returns. The letter highlights that PSBs are ineligible for the tax reductions and deductions afforded to other corporations, which results in higher tax rates. Contractors are given the option to request a reassessment of their reported earnings should they find discrepancies. The CRA also notes the possibility of future reviews, underscoring the need for precise record-keeping. Again, it is important to note that you are not required to accept being a Personal Service Business based on this preliminary assessment by the CRA.

Webinar on How To Avoid PSB/PSC Risk

Importance Of Understanding The Difference Between Employee & Independent Contractor

Before we discuss the top 10 strategies to mitigate PSB/PSC risk, it is important to understand the difference between an employee and an independent contractor. The Canada Revenue Agency (CRA) has a helpful guide listed as CRA Guide RC4011, which breaks down the differences between these two statuses. It can be a very useful resource to understand the CRA’s perspective on this matter.

Top 10 Strategies To Mitigate PSB/PSC Risk

1. Strong, Clear and Correctly Worded Written Contract

Written contracts have been given significant importance by Tax Court judges. Landmark Wiebe Door tax court case criteria should be used for basis of contract. You should have your own lawyer review the written contract, and you should use a lawyer experienced with the tax issues involved.

2. Work Relationship Conduct must support the Contract

The actual working relationship experience must not contradict any of the written contract terms. Ensure that there are many significant working relationship differences between yourself and the employees of your client.

3. Limit Contract Length

Limit written contract terms to a maximum of 6-12 months, and consider avoiding multi-year renewals/relationships with the same client.

4. Diversify Your Client Base

Consider avoiding always having one client be 100% of your revenue, i.e., even some part-time clients that account for 10% to 20% of your revenue is preferable. It also makes good business/economic sense to always have more than one client/revenue source.

5. Implement Asset Protection Strategies

 Creative and pro-active asset protection strategies should be utilized to protect yourself from CRA and also any other similar “attacks” on your finances, i.e. lawsuits. Such strategies range from simply ensuring that major financial assets (i.e. personal residence, RRSP’s) are kept in only the name of the low risk spouse, to more complex asset protection strategies.

6. Control Your Work

Although the client can specify results and deadlines, you should control the method and manner of work to achieve those results. For example, if you hire a painter to paint your house, you would provide the deadline and the colour choice and they would determine the process.

7. Get Liability Insurance

It’s important to assess your risk and consider coverage because, as an independent contractor, you don’t have the financial resources of a big company to back you up in the event of a client lawsuit.

8. Build a Professional Profile

Websites are not limited to small and large corporations. They prove beneficial for contractors / freelancers alike as they serve as a method of promotion for who you are and the services you offer. Have your own business cards and avoid having a business card with the client’s name on it and avoid appearing on the client’s internal telephone list. That makes you look more an integrated part of the company and less like an outside consultant or contractor.

9. Your Company’s Name Should Reflect Your Services

Ask yourself when you last did business with a company named 123456 Ontario Ltd. Name your company appropriately. Numbered companies are good for holding companies not for operating companies.

10. Hire Experienced Professionals to Represent You

If you do not understand the language and implications of the personal service business (PSB) risk, it is very easy to expose yourself to risk.

Support and Resources For Independent Contractors

Our firm offers unique tools and services to support independent contractors in minimizing risk related to personal service business assessments and employment law issues. These include:

  1. Audit Representation Protection: We provide representation at no additional cost if you are assessed, ensuring you have access to knowledgeable resources without financial burden.
  2. Personal Service Business Protection: It is extremely important to protect yourself from being classified as a Personal Services Business (PSB) by the Canada Revenue Agency (CRA). Fortunately for our clients, at CPA4IT we have the knowledge and expertise to ensure that your business is taxed as a small business and not a PSB.

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A great small business tax accountant does more than just measure value, they create it. At CPA4IT our goal is to save you substantially more than it costs you for our services. Over the last 30 years we have developed tax strategies designed to help you keep more of your hard earned money. If you would like to learn how we can help you pay less tax, simply download our FREE Guide to Pay Less Tax.

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Pay Less Tax

A great small business tax accountant does more than just measure value, they create it. At CPA4IT our goal is to save you substantially more than it costs you for our services. Over the last 30 years we have developed tax strategies designed to help you keep more of your hard earned money. If you would like to learn how we can help you pay less tax, simply download our FREE Guide to Pay Less Tax.