Who this is for
Anyone who provides their own services through a corporation. IT consultants, construction contractors, incorporated nurses and other professionals, truck drivers with their own company. Anyone whose corporation has one main client.
The five questions
-
Do you provide your services through a corporation? If you are a sole proprietor, this does not apply. It only applies when a company sits between you and the client.
-
Do you, or someone related to you, own 10% or more of the shares? The CRA calls this being a specified shareholder. Almost every owner-operator does.
-
Does the corporation have five or fewer full-time employees through the year? A company with six or more full-time employees is outside the rule. Most one-person companies are inside it.
-
Is the client unrelated to your corporation? If your company is paid by an associated corporation, different rules apply. For most people the client is an unrelated business, so this condition is met.
-
Without the corporation, would you reasonably be considered the client’s employee? This is the deciding question, and the CRA says it is analysed case by case by looking at the working conditions. The usual factors. Who controls when, where and how you work. Who owns the tools and equipment. Whether you can hire a helper or send a replacement. Whether you can make a profit or a loss. Whether you take on your own customers.
All five must be met for the corporation to be a PSB. Fail any one and it is not.
What changes if it is a PSB
The income from that client is taxed at the full corporate rate, with no small business deduction and no general rate reduction. An additional 5% federal tax applies. The corporation can deduct little more than the salary it pays you and a few employment-type costs. Fuel, equipment, office and other operating expenses can be refused for that income. A reassessment can cover several years at once.
One thing many people do not realize
Having one big customer does not, on its own, make your corporation a personal services business. The CRA applies five conditions. The one that decides most cases is whether you would reasonably be seen as the client’s employee if the corporation did not exist. That is judged on how the work is actually done, case by case. Who controls the schedule, who owns the tools, who carries the financial risk, whether you can send someone in your place.
What to prepare
- Your contracts or agreements with each client
- A note of how the work actually runs: schedule, location, equipment, who pays for what
- Invoices and the number of customers in the last two years
- Any correspondence with the client about how you are engaged
- Last two T2 returns
When professional help may make sense
If you have one client and the contract reads like a job description, get the structure looked at before the CRA does. If you have received a questionnaire or letter about employment status, do not answer it alone. The answers set the facts for the whole review.
How Rex Tax may be able to help
We prepare corporate returns for contractors, consultants and incorporated drivers, and we look at how the relationship actually works before the return is filed. We explain the options. We do not promise a particular result from the CRA, and if a dispute needs a tax lawyer we will say so.
From the Rex Tax desk
The owners who worry most are often the ones with the least to worry about. They already run a real business with their own equipment, several customers and real risk. The ones who should look harder have a single client, a set schedule, the client's equipment and a contract that reads like a job description. Read your own contract the way an outsider would.
Official sources
- CRA: Determine if the worker's corporation is carrying on a personal services business
- CRA: What is a personal services business
This guide is general information, not advice about your situation. It reflects the rules for the 2026 tax year. It has not yet been reviewed by a practitioner. The information was checked against the official sources listed above on the date shown. Rules change. Check the official sources above or ask us. How we prepare these guides.