40 Hour Contract PSB Risk: What Fixed Hours Mean for Your Corporation
Here is the short answer on 40 hour contract PSB risk. A 35, 37.5 or 40 hour contract does not by itself make your Ontario corporation a personal services business (PSB). Fixed hours are one sign of control. CRA tests the whole relationship, year by year. PSB income is taxed at 44.5% instead of the current 11.2% small business rate.
Why does a fixed-hours clause matter for PSB risk?
Most contractors I work with bill a bank, insurer, government or large enterprise through their own Ontario corporation, often via a staffing agency, on 35, 37.5 or 40 hours a week. The question I hear most: does that number put my corporation at risk?
The number does not decide it. It matters because of how the Income Tax Act defines a PSB.
Under section 125(7), your corporation carries on a PSB in a year when two things are true and no exception applies. First, you (the person who does the work) or a person related to you is a specified shareholder. That means owning 10% or more of any class of shares, directly or indirectly. Second, you would reasonably be regarded as an officer or employee of the client if your corporation did not exist.
The second part is where hours come in. CRA answers it with the tests the courts use to tell an employee from a contractor, and control is one of them. I explain the full set of rules, including the two exceptions, on our page about personal services business risk.
What does a 35, 37.5 or 40 hour clause signal about control?
A fixed number of hours is a control indicator, but it can also be a billing term: how much time the client is buying. What sits around it decides how much weight it carries.
Fixed hours and set schedules
A clause that caps billable hours at 37.5 a week is mainly a budget limit. A clause that says you must work 40 hours, at set start and finish times, on days the client picks, looks more like a staff schedule. The second version points to the client controlling when and how much you work.
Timesheet approval by the end client
Almost every agency contract needs a timesheet. If the agency uses it only to bill the client, it is an invoicing step. If an end client manager approves your hours, approves your time off and reviews your work the way they review staff, it signals supervision.
Onsite days, VPN-only access and client laptops
Banks, insurers and governments often require onsite days, VPN-only access and a client-supplied laptop. These are control indicators: the client decides where you work and with which tools. Many are security rules for every outside firm, and I note that, because it can read differently from a manager directing your day.
Hours clauses compared
Here is how I look at the hours-related clauses I see most often.
| Hours-related clause | What it signals about control | What to document |
|---|---|---|
| Fixed 35, 37.5 or 40 hours a week | The client sets how much you work, like a staff position | Whether it is a billing cap or a required schedule, and who sets when hours are worked |
| Set start and finish times or core hours | The client sets when you work | The flexibility you actually use, and whether the times tie to team meetings or to deliverables |
| Timesheet approval by an end client manager | The client checks your time the way it checks staff time | Who approves, and whether approval is only for billing or also judges your performance |
| Extra hours need client approval | The client controls the amount of work | How extra hours are requested and billed, and who decides they are needed |
| Onsite days or VPN-only access | The client controls where and how you work | The security or regulatory reason, and whether it applies to all outside firms |
| Client-supplied laptop and accounts | The client owns the tools | The security reason, plus the equipment, software and licences your corporation pays for |
| Time off needs client approval | Close to staff leave approval | Whether you give notice for planning, or ask for permission |
One row does not decide anything.
Do hours alone decide PSB status?
No. Hours alone never decide PSB status. The courts set out the approach in Wiebe Door Services Ltd. v. M.N.R. and 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. The central question is whose business it is. Are you in business on your own account, or working inside the client’s business?
The tests look at four main factors:
- Control over the work and how it is done.
- Ownership of tools and equipment.
- Chance of profit and risk of loss.
- Integration, meaning whether the work is part of the client’s business or your own business.
Hiring helpers, investment and management also count. Calling yourself an “independent contractor” in the contract does not settle it.
The test also runs year by year. Each taxation year of your corporation stands on its own facts. A renewal that moves you onsite five days a week, or a new manager who sets your daily tasks, can change the picture for that year.
Which facts can weigh the other way?
A 40 hour week can sit inside a relationship that still looks like a business. These facts can weigh against employee status. None of them settles the question on its own, and none of them promises a result.
- Scope defined by deliverables. A statement of work with clear outputs, milestones and acceptance terms, rather than an open-ended role.
- Your own tools. Equipment, software, licences, training and a workspace your corporation pays for and uses for the work.
- Other clients. Work for more than one client in the year, or a real effort to market your corporation to others.
- A right to send a substitute. A real right to send another qualified person, subject to the client’s security checks, that works in practice and not only on paper.
- Real financial risk. Unpaid rework, fixed-price pieces of work, your own professional liability insurance, unpaid gaps between contracts, and costs you carry whether or not you bill.
I weigh these alongside the hours. A deliverables-based scope with a 40 hour cap can read very differently from an open-ended, staff-style role at 35 hours.
What is the tax difference if your corporation is a PSB?
One number shows the cost. On $150,000 of income kept in an Ontario corporation, tax at the current 11.2% small business rate is $16,800. At the 44.5% PSB rate, it is $66,750. The difference, $49,950, applies to every year CRA treats as PSB income.
Why 44.5%? Federal tax on PSB income is 33%, because there is no small business deduction, no 13% general rate reduction and an additional 5% tax under section 123.5. Ontario adds its 11.5% general rate. On the other side, 11.2% is the rate for income earned from July 1, 2026. Before that date it was 12.2%, so a December 31, 2026 year-end pays a blended 11.70% for 2026, which is $17,543.84 on the same $150,000.
Deductions shrink too. Under section 18(1)(p), a PSB can deduct only salary and other pay to you, the cost of benefits or allowances provided to you, certain costs of selling property or negotiating contracts that an employee could deduct, and legal costs to collect amounts owed for your services. Rent, software, equipment, travel, phone, insurance and accounting fees are denied. You can test your own figures with our PSB tax cost calculator.
What should you keep on file each year?
Records do not change the facts, but they let you show them. Each year, I suggest keeping:
- The agency contract, the statement of work, and every extension or renewal.
- The end client’s onboarding rules, security rules and equipment policy.
- A short note on why the hours are fixed, for example a budget cap or a release schedule.
- Invoices that describe deliverables, not only hours.
- Receipts for equipment, software, training and insurance your corporation pays for.
- Contracts, proposals or marketing for other clients.
In an agency setup, CRA looks at whether you would reasonably be an employee of the party your services are really provided to, usually the end client. So the agency contract and the end client’s onboarding rules both matter.
How do we review 40 hour contract PSB risk as part of tax planning?
We review your contract and working facts as part of tax planning. In practice:
- We read the agency contract, the statement of work and the end client’s onboarding rules.
- We ask how the work happens day to day: who assigns tasks, who approves time, where you work and what you own.
- We map those facts against the control, tools, profit and loss, and integration factors.
- We look at your pay mix. Salary paid to you stays deductible even in a PSB, so salary and dividend planning matters.
- We tell you which facts to document and where your file is weakest.
For background, CRA’s guide RC4110, “Employee or Self-Employed?”, explains how CRA looks at a working relationship. Form CPT1 asks CRA for a CPP and EI ruling on a worker’s status. That ruling does not decide PSB status for income tax, although CRA looks at similar facts, so we review whether a request is useful in your facts.
We are accountants, not lawyers, so new contract wording is a job for your lawyer. To see how specific clauses are read, please visit our page on PSB contract review. You can also see how we work with IT contractors on our accountant for IT contractors page, and with FP&A, controllership, risk and audit contractors on our accountant for finance contractors page.
Our team includes a second designated CPA (CPA Ontario) and bookkeeping support staff. We serve incorporated Canadian businesses only, on a fixed flat-fee model.
If your contract says 35, 37.5 or 40 hours and you want to know how it reads, please book a consultation. Please bring your agency contract, your statement of work and the end client’s onboarding rules. You can also call us at 647-212-9559, 9AM to 8:30PM, Monday to Sunday.
Frequently asked questions
Does a 40 hour contract make my corporation a personal services business?
Not by itself. A 40 hour week is one control fact. CRA looks at the whole relationship, including control, tools, chance of profit and risk of loss, and integration, and asks whose business it is.
Is a 37.5 hour contract lower risk than a 40 hour contract?
Not on its own. The difference in hours is small. What matters more is whether the hours are a billing cap or a required schedule, and what the rest of the relationship looks like.
Does timesheet approval by the end client add to PSB risk?
It can. If an end client manager approves your time and supervises your work like staff, it points to control. If the timesheet is only used by the agency for billing, it carries less weight. We note who approves and why.
I must use the client’s laptop and VPN. Is that a problem?
It is a control indicator, because the client decides your tools and access. Banks, insurers and governments often require this from every outside firm for security reasons. We document the reason and the tools your corporation does pay for.
If CRA finds my corporation is a PSB, what rate applies?
PSB income is taxed at a combined 44.5% in Ontario. The current small business rate, from July 1, 2026, is 11.2%. On $150,000 kept in the corporation, that means $66,750 of tax instead of $16,800. Section 18(1)(p) also denies most expenses.
Is PSB status decided once for the whole contract?
No. It is tested year by year, for each taxation year of your corporation. A renewal, a new manager or a move to full-time onsite work can change the facts for that year.
Can you change the hours clause in my contract?
No. We are accountants, not lawyers, so any change to contract wording is for your lawyer. As part of tax planning, we review the hours clause and how you actually work, and tell you which facts to document.
Should I file Form CPT1 to get a ruling?
A CPT1 ruling deals with CPP and EI status, not PSB status for income tax, though CRA looks at similar facts. We review whether it is useful in your facts before you decide.