Reduce Personal Service Business Risk
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.
If you are worried that you may be classified as a Personal Service Business, please take our PSB classifier survey. We will respond with a classification, a probability of our ability to defend that classification and links to relevant tax court cases.
What you need to know today to protect your Business.
Many small business and independent service providers are at risk of being classified as personal services businesses by the Canada Revenue Agency (CRA). This change could have significant implications for your tax obligations. If the CRA decides to designate your company as a personal services business, you could lose many of the tax benefits currently available to you.
Understanding the risks of this CRA designation is extremely important for IT professionals and independent contractors.While many accounting firms avoid dealing with IT professionals, CPA4IT makes helping them a priority and ensures that IT professionals have tax specialists to fight for their interests.
The tax experts at CPA4IT have extensive experience helping companies avoid the personal service business reclassification. CPA4IT specializes in assisting independent contractors looking to minimize this risk and maintain their current tax classification. Our service could help save you a considerable amount of money.
If you’re a small business owner, you’ve probably heard of the personal services business designation before. While an independent company, personal service businesses are essentially incorporated employees. They provide independent consultation or service to a client in a way which could be considered an employee-employer relationship. If the CRA decides that your business is, in effect, an employee of another business, this will have a major impact on your tax status.
The risk of being classified as a personal services business by CRA could come as a surprise to some of you, but it is becoming a reality for many individuals. If you are a business with under 5 employees, or a business whose revenue comes from a single client, you are at the greatest risk for this classification. If classified under this group, you could lose many of the tax benefits you would have as an incorporated individual. The CRA has re-designated many IT consulting companies as personal service businesses in recent years.
For those who are unaware, the CRA has been vigilantly watching over independent consultants who are sole shareholders of their own corporation.The CRA loses billions of dollars every year in lost income taxes, simply because employees begin their own corporation. It is currently working very hard to get this money back.
The risk of CRA classification as a personal services business is something IT consultants need to consider. Today, many IT consultants have incorporated their own company to benefit from the tax advantages that come with this status. When a well-paid IT consultant opens their own company, incorporates it and begins working for their former employer, this is a red flag for the CRA. This changed tax status is likely to cause a significant loss of revenue for the government. It is one of the reasons why the CRA is considering some IT consultants as personal service corporations, as the CRA believes that these individuals are actually employees and are avoiding taxation.
The CRA has therefore recently implemented new regulations in the Income Tax Act that allow it to crack down on IT consulting companies and reassess their tax files. If the CRA characterizes your IT consulting firm as a personal services business, you could end up losing the tax benefits you’ve been able to enjoy and you could face stiff penalties. Personal service business risk has become a serious issue for many IT consulting companies and it requires the advice of a professional accounting expert.
Personal services businesses are subject to hefty tax rates. If the CRA labels your corporation in this category, you will have to pay the standard corporate tax rate rather than the dramatically reduced small business tax rate. In addition, personal services businesses are extremely limited in the business expense deductions. While small businesses are able to claim a wide-range of expenses, from advertising to transportation to training costs, personal services businesses may only claim wages and salaries. These tax rules also prevent independent contractors from other tax benefits such as income splitting.
All in all, a company classified as a personal services business will not be able to make the most of their revenue because of such heavy taxation. If you are deemed to be a personal services business, reassessment could end up costing you well into the thousands of dollars.
If this were the extent of the tax implications, that would be frightening enough. However, a reclassification to a personal services business by CRA can cause much greater damage. In some cases, auditors have reassessed individuals for past years as well. A reassessment covering multiple years could lead to tax bills in the hundreds of thousands of dollars. The thought of being classified as a personal service business by the CRA might run shivers down your spine, but don’t worry, there are certain preventative measures that we can help you take to avoid this danger.
There are steps you can take to protect your business and provide you with financial security. In order to protect yourself from designation as a personal service business by the CRA, and avoid the trauma of a possible CRA audit, you should implement the following:
Make a clear distinction between a business relationship and an employer-employee relationship. This should be done with a clearly written contract. You should have your contract reviewed by a lawyer who is experienced with personal services businesses specifically, not just in the tax field. There is a risk of a revaluation by the CRA coming at any time, so it is important to be prepared ahead of time.
Provide a professional image for your company. If you want to be treated like a company, not an employee, you need to set up and treat your company appropriately. Use a name not a numbered company, set up a website and general online presence, print business cards, and use appropriate business language. Also, try to stay off of the company phone directory. When you are on the company’s phone list, you won’t look so much like an independent IT consultant.
In order to minimize the risk of being grouped as a personal service business by the CRA, you want to have liability insurance coverage as well. It is best to be protected at all times, especially when you’re conducting business as an independent.
The process through which you conduct business tells the CRA a lot about whether you’re a personal services business or not. A personal service business receives specific details on how it should conduct its business from the client. An independent contractor should have full control over the manner in which it provides results for its client. You should ensure that your contract and your conduct don’t appear to be under the control of the client company. This means that your client and the contract should indicate what they want you to do, not how they want you to do it. Consider the analogy of hiring a painter. You would tell a painter what room you want painted and what colour you want it painted, but you would not tell him how to do the painting. They are an independent expert who you have contracted to do a specific job and they control the work process.
These are just a few of the measures CPA4IT recommends to help you stay protected against this classification. The first and most important step, however, is having a knowledgeable consultant who can advise and represent you if your business happens to be audited by the CRA. That is why we’re here. At CPA4IT we provide our clients with our specialized expertise, which is catered to small businesses in order to protect you from excess tax rates and penalties. We care about the success of your business and we work to help you make the most of your revenue. We have the know-how to effectively protect companies from classification as a personal services businesses. By allowing CPA4IT to guard your company from personal services business classification, you can have huge savings on your tax bill.
It pays to have an experienced tax professional who can advise you on the risks associated with classification as a personal service business by CRA.
CPA4IT team members have helped numerous independent consultants win cases against the CRA. It is important that you recognize that the CRA doesn’t always win personal services business cases; it is possible for incorporated professionals to maintain their business status and continue to benefit from the tax advantages. All this starts with having proper tax representation by a qualified tax services firm like CPA4IT.
Filing taxes incorrectly is a serious danger for many small businesses. This pitfall can lead to significant penalties. When corporations file their taxes as small businesses, and are found to be personal services corporations, they are subject to penalties and tax audits. Contracting our trusted experts before you face a CRA audit can help prevent you from becoming a subject of interest for the CRA and provide you with the coaching to protect your business from being subject to an audit.
If your business is faced with a tax audit with the Canada Revenue Agency, don’t worry, we can help. It is extremely important, in the case of an audit, that you hire an experienced accounting or tax expert who can provide you with the counsel you need. CPA4IT is unparalleled as a representative for company’s facing a CRA audit and can provide the expertise you need to avoid a costly tax bill. We have never lost a major tax audit case in 30 years of service!
Having CPA4IT’s professional accountants help you avoid the risk of personal business services designation can save your company thousands to hundreds of thousands of dollars. This service protects your bottom line and your peace of mind. If you are at risk for designation as a personal services business, you need to contact our tax experts. We have an outstanding record of standing strong behind our IT professional clients over the last 25 years, providing them with the best expert representation available.