Personal Services Business Risk for Incorporated Contractors in Ontario

Personal services business risk is the risk that CRA decides your Ontario corporation is really supplying an employee, you, to its client. If that happens, the corporation loses the small business deduction, pays 44.5% tax instead of 11.2%, and loses most of its expense deductions. The risk depends on how you actually work, not just the contract.

This page is for contractors who bill through their own corporation, often through a staffing agency, on a 35, 37.5 or 40 hour contract. The structure is legal and common. The question is whether CRA would see the work as a job billed through a corporation.

What is a personal services business?

Section 125(7) of the Income Tax Act defines a personal services business (PSB). It is a business of providing services where two things are true:

1. The individual who performs the services for the corporation, called the incorporated employee, or a person related to that individual, is a specified shareholder of the corporation.
2. The incorporated employee would reasonably be regarded as an officer or employee of the person or partnership receiving the services if the corporation did not exist.

The second point is the heart of it. CRA takes the corporation out of the picture and asks one question: would you simply be that client’s employee?

Who is the incorporated employee?

It is the person doing the work. If your corporation bills a bank for your time as a data engineer, you are the incorporated employee. The label names the person whose working relationship gets tested. It does not mean you are an employee.

What is a specified shareholder?

A specified shareholder owns 10% or more of any class of the corporation’s shares, directly or indirectly. Most contractors own all the shares of their corporation, so this part is usually met. Putting the shares in a spouse’s name does not get around it, because the rule also covers persons related to you.

What are the two exceptions?

A business that meets the definition is still not a PSB if either exception applies:

• More than five full-time employees. The corporation employs more than five full-time employees in the business throughout the year. That means at least six, full-time, for the whole year. Whether owners or family members count depends on their real roles, so this needs review on your facts.
• Services to an associated corporation. The amount for the services is received from a corporation associated with yours in the year.

A one-person contractor corporation billing an agency or an end client usually fits neither exception. That is why the employee question matters so much.

What happens if CRA treats your corporation as a PSB?

Four things change at once:

• No small business deduction.
• No 13% federal general rate reduction.
• An additional 5% federal tax under section 123.5.
• Deductions limited by section 18(1)(p).

Federally, that is 38% less the 10% abatement, which leaves 28%, plus the extra 5%, for 33%. Add Ontario’s 11.5% general rate and PSB income is taxed at a combined 44.5%.

Which expenses can a PSB still deduct?

Section 18(1)(p) allows only:

• salary, wages or other remuneration paid in the year to the incorporated employee;
• the cost of benefits or allowances provided to the incorporated employee;
• certain amounts spent selling property or negotiating contracts, if an employee could deduct them; and
• legal expenses to collect amounts owed for the services.

Rent, software, equipment, travel, phone, insurance, accounting fees and similar costs are denied.

How big is the gap between 11.2% and 44.5%?

Ontario cut its small business rate on July 1, 2026. The combined small business rate was 12.2% on income earned before that date and is 11.2% from that date. A December 31, 2026 year-end gets a day-weighted blended rate of 11.70% for 2026. I use the current 11.2% below.

Take a contractor billing $95 an hour for 37.5 hours a week over 48 weeks. That is $171,000 of revenue. Assume $9,000 of expenses, none of them an allowed type, no salary, and a full year at 11.2%.

That is $57,951 more corporate tax in one year on the same work. Salary helps but does not fix it. If the corporation paid you a $120,000 salary, corporate tax would be $4,704 if it is not a PSB and $22,695 if it is, still $17,991 more. That leaves out employer CPP and the personal tax on the salary. Our PSB tax cost calculator runs these numbers on your own figures.

A reassessment can also reach back to earlier years, when the rate was 12.2%. For 2025, with $159,000 of revenue and $9,000 of expenses, tax filed at $18,300 becomes $70,755 as a PSB. That is $52,455 more for one year, before arrears interest.

What about dividends and GRIP?

PSB income is not eligible for the small business deduction, so it is taxed at the full rate and adds to the general rate income pool (GRIP). Dividends paid from it can be designated eligible dividends. That softens the hit but does not close the gap.

At top 2026 marginal rates, $100,000 of PSB income costs $44,500 in corporate tax. The remaining $55,500, paid as an eligible dividend at 39.34%, costs $21,833.70. Total tax is $66,333.70, or 66.33%. The same $100,000 paid to you as salary would cost $53,530 at 53.53%. The PSB route costs $12,803.70 more.

How does CRA decide whether you are really an employee?

CRA and the courts use the approach from Wiebe Door Services Ltd. v. M.N.R. and 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. The central question is: whose business is it?

The main factors are:

• Control: who decides what work you do, and how, when and where you do it.
• Tools and equipment: who supplies the laptop, software, access and workspace.
• Chance of profit and risk of loss: whether you can earn more by working well, and whether you can lose money.
• Integration: whether your work is part of the client’s business or part of your own.

Hiring helpers, your own investment and how you manage the work also count. No single factor decides the result.

CRA guide RC4110, Employee or Self-Employed?, sets out how CRA looks at a working relationship. Form CPT1 is used to request a CPP/EI ruling on a worker’s status. A CPT1 ruling deals with CPP and EI. It is not a PSB ruling for income tax, though CRA looks at similar facts. We review whether a CPT1 request is useful in your facts.

Does a 35, 37.5 or 40 hour contract make you an employee?

Not on its own. Fixed hours of 35, 37.5 or 40 a week, set schedules, timesheets approved by the end client, onsite or VPN-only rules and a client-supplied laptop are all control indicators. They add weight on the employee side. But hours alone never decide PSB status. CRA tests the whole relationship, year by year. I explain this in more detail on our page about 40 hour contract PSB risk.

How does a staffing agency change the picture?

Most contractors work in a three-party setup: your corporation, the staffing agency and the end client. CRA looks at whether you would reasonably be an employee of the party you really provide the services to. That can be the end client, not the agency. So the agency contract matters, and so do the end client’s onboarding rules, security policies and day-to-day management.

Which contractors face the most personal services business risk?

The risk is highest where the setup looks most like a job: one main client, a long engagement, fixed hours, client equipment and a client manager. That pattern is common for IT and finance contractors placed with banks, insurers, governments and large enterprises. If that is you, please see our pages for an accountant for IT contractors and an accountant for finance contractors.

How do we help reduce personal services business risk?

No one can promise that CRA will accept your position. What we can do is help you reduce the risk, document the facts and support your position if CRA asks questions.

• Review. We review your contract and working facts as part of tax planning: control, equipment, profit and loss, integration, the agency structure and the hours clause. See how our PSB contract review reads common clauses. We are accountants, not lawyers, so contract wording is for your lawyer.
• Document. We help you keep clear records of how you actually work: your own equipment, your investment, other clients and how you invoice. Records must reflect real facts.
• Plan. We set up payroll (salary, T4 slips and remittances), plan your salary and dividend mix, and handle your T2 corporate tax return, bookkeeping and GST/HST filings.
• Support. If CRA reviews your corporation, we act as its authorized representative. We respond to CRA requests and questionnaires, organize your documents, communicate with the auditor, and review and respond to proposal letters.

We work on a fixed flat-fee model and serve incorporated businesses only. When you are ready, book a consultation and we will look at your facts.

I am Sharad Gondaliya, CPA (Canada and USA), Founder and Managing Director of Gondaliya CPA Professional Corporation in Toronto. Our team includes a second designated CPA and bookkeeping support staff. We have 1300+ five-star Google reviews and are a 2026 Xero Awarded Firm. If you bill through your own corporation, please book a consultation. You can also call 647-212-9559 or email info@gondaliyacpa.ca, 9AM to 8:30PM, Monday to Sunday.

Related contractor services

• Staffing agency contractor tax
• Salary vs dividend for incorporated contractors
• CRA PSB review support
• Incorporated contractor accountant in Toronto

Frequently asked questions

Is every incorporated contractor a personal services business?

No. A corporation carries on a PSB only if the person doing the work, or a related person, owns 10% or more of any class of its shares, and the person doing the work would reasonably be regarded as the client’s employee if the corporation did not exist. Many contractors have facts on both sides, which is why each relationship needs review.

How much more tax does a PSB pay in Ontario?

The combined rate on PSB income is 44.5%, compared with the current small business rate of 11.2%. On $150,000 of income kept in the corporation, that is $66,750 instead of $16,800, a difference of $49,950 in one year.

Can a PSB still deduct its expenses?

Only a few. Section 18(1)(p) allows salary and benefits paid to the incorporated employee, certain costs of selling property or negotiating contracts that an employee could deduct, and legal costs to collect amounts owed for the services. Rent, software, equipment, travel, phone, insurance and accounting fees are denied.

Does a 40 hour contract make my corporation a PSB?

Not by itself. Fixed hours, set schedules and client-approved timesheets point toward control, but hours alone never decide PSB status. CRA looks at the whole relationship, year by year.

Will a CPT1 ruling settle my PSB status?

No. A CPT1 ruling deals with CPP and EI status. It is not a PSB ruling for income tax, although CRA looks at similar facts. We review whether a CPT1 request is useful in your facts.

Can you make sure my corporation is never treated as a PSB?

No one can promise that. We help you reduce the risk by reviewing your contract and working facts as part of tax planning, documenting how you really work, and supporting your position if CRA asks questions.

Do you work with contractors who are not incorporated?

No. For these services we work only with incorporated Canadian businesses. If you have not incorporated yet, we can help with incorporation first.