What Is a Personal Services Business in Canada? A CPA Explains for IT Contractors

What is a personal services business (PSB)? It is a business a corporation carries on by providing an individual’s services, where that individual, or a related person, owns 10% or more of any class of its shares, and the individual would reasonably be the client’s employee without the corporation. In Ontario, PSB income is taxed at 44.5%, not 11.2%.

Key takeaways

Why does the personal services business rule exist?

Canada gives small active businesses a low tax rate through the small business deduction. Without a special rule, an employee could set up a corporation, bill the employer through it, and pay corporate tax at the small business rate instead of personal tax on a salary.

The PSB rules are aimed at that situation. They do not turn your corporation’s income into salary. The income stays business income of the corporation. What changes is the tax result: the small business deduction is gone, most expenses are denied, and an extra federal tax applies.

This matters to IT contractors because the usual setup can look a lot like a job. One long contract, through a staffing agency, with a bank, insurer, government or large enterprise, on a 35, 37.5 or 40 hour week. That is a legal and common way to work. It is also the pattern the definition was written to test.

What is a personal services business under section 125(7)?

In plain words, a personal services business is a business of providing services where both of these 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.

Even when both are true, the business is not a PSB if either exception applies. The first is that the corporation employs more than five full-time employees in the business throughout the year. The second is that the amount for the services is received from a corporation associated with it in the year.

Now let me take each piece in turn, using IT examples.

Piece 1: Is it a business of providing services?

Your corporation sells your time and skill. A developer billing by the hour, a DevOps engineer running build pipelines, a data engineer building data flows, a cloud architect, a penetration tester, a QA analyst, a business analyst and a project manager are all providing services. Selling software licences or hardware would be a different kind of business. Almost every hourly IT contract meets this first piece.

Piece 2: Who performs the services?

The incorporated employee is the person who actually does the work for the corporation. If the agency placement names you, and you are the one writing the code or running the tests, that is you.

The term is only a label. It does not mean CRA has decided you are an employee. It tells you whose working relationship gets tested in the next pieces.

Piece 3: Are you a specified shareholder?

A specified shareholder owns 10% or more of the shares of any class of the corporation, directly or indirectly. Shares held by people you do not deal with at arm’s length, such as your spouse, can count toward that 10%. The definition also covers the case where a person related to you, rather than you, is the specified shareholder.

So if you own 100% of your corporation, this piece is met. If you and your spouse each own 50%, it is met. If your spouse owns all the shares and you own none, it is still met, because a person related to you is a specified shareholder. For most one-person IT corporations, this piece is simply met.

Piece 4: Would you reasonably be the client’s employee?

This is the piece that decides most files. CRA imagines your corporation is gone and asks one question. If you did this same work directly for the client, would you be its employee, or would you be in business for yourself?

To answer it, CRA and the courts look at the whole working relationship. They 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 it is. I explain each factor in my post on the Wiebe Door and Sagaz tests. Here is how the factors tend to show up in IT work:

• Control. Does the client’s manager or scrum master assign your tickets, set your sprint work and approve your timesheets? Or do you agree on a deliverable and decide how and when to do it?
• Tools and equipment. Do you work on a client-issued laptop, inside the client’s VPN, with the client’s software licences? Or on your own equipment, with your own tools and licences?
• Chance of profit and risk of loss. Are you paid for every hour no matter what? Or can you earn more by working efficiently on a fixed-price piece of work, and lose money if you must fix defects on your own time?
• Integration. Are you part of the client’s team, with a client email address, a badge and a place on its org chart? Or is the work part of your own business, which also serves other clients?

Hiring helpers, your own investment and how you manage the work count too. No one factor settles the answer.

CRA explains its approach in guide RC4110, Employee or Self-Employed? Form CPT1 is a request for a CPP/EI ruling on a worker’s status. That ruling covers CPP and EI only. It does not decide PSB status for income tax, though CRA looks at similar facts.

Piece 5: Does either exception apply?

The first exception needs more than five full-time employees in the business throughout the year. That means at least six people, full-time, for the whole year. A one-person IT corporation does not meet it. Whether you, your spouse or other family members count depends on your real roles, so this needs careful review in any file that comes close.

The second exception applies when the corporation is paid for the services by a corporation associated with it in the year. When you bill a staffing agency or an unrelated bank, the payer is normally not associated with your corporation, so this exception does not usually help.

How does each part of the definition apply to an IT contractor?

Here is the whole definition in one place, with what each element means for a typical IT contractor.

What about 35, 37.5 or 40 hour contracts?

Most IT contracts set fixed hours. Fixed hours of 35, 37.5 or 40 a week, set schedules, timesheet approval by the end client, onsite or VPN-only requirements and client-supplied laptops are control indicators. They add weight on the employee side of piece 4. But hours alone never decide PSB status. CRA tests the whole relationship, year by year.

Does the staffing agency change who the client is?

Many IT contractors work in a three-party setup: your corporation, a 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 may be the end client, whose manager directs your work, rather than the agency that pays your invoice. So the agency contract matters, and so do the end client’s onboarding rules.

What does PSB status cost an IT contractor in Ontario?

The definition matters because of the cost. First, the rates. The current combined federal and Ontario small business rate is 11.2%, from July 1, 2026. Income earned before that date was taxed at 12.2%, and a corporation with a December 31, 2026 year-end gets a blended 11.70% for 2026. PSB income is taxed at a combined 44.5% in Ontario. I break those rates down in my post on the PSB tax rate in Ontario.

Now a worked example. A developer bills $95 an hour for 37.5 hours a week over 48 weeks, so the corporation’s revenue is $171,000. It has $9,000 of expenses, such as software, phone, internet, insurance and accounting fees. It pays no salary, and the example assumes a full taxation year at the 11.2% rate.

• Not a PSB: ($171,000 minus $9,000) x 11.2% = $18,144 of corporate tax.
• PSB: the $9,000 of expenses is denied under section 18(1)(p), so $171,000 x 44.5% = $76,095 of corporate tax.
• Difference: $57,951 more corporate tax in one year.

Same work, same client, same hours. The only change is how the relationship is classified.

Section 18(1)(p) limits a PSB’s deductions to salary, wages and other remuneration paid to the incorporated employee, benefits or allowances provided to that person, certain costs of selling property or negotiating contracts that an employee could deduct, and legal costs to collect amounts owed for the services. Software, equipment, phone and similar costs are denied. Paying yourself a salary narrows the gap, because that salary stays deductible, but it does not close it. You can test your own figures with our PSB tax cost calculator.

There is one partial offset. PSB income does not get the small business deduction, so it adds to the general rate income pool (GRIP), and dividends paid from it can be designated eligible dividends. At top 2026 rates, $100,000 of PSB income costs $44,500 in corporate tax, plus $21,833.70 of personal tax on the $55,500 eligible dividend. That is $66,333.70 in total. The same $100,000 paid as salary would cost $53,530.

What does the definition not say?

A few beliefs come up often with IT contractors. None of them is in the definition.

• “I am incorporated, so I am not an employee.” The definition assumes you are incorporated. It asks what you would be without the corporation.
• “My contract says independent contractor.” The wording of the contract is considered, but CRA looks at how you actually work.
• “The agency is my client, so only the agency contract counts.” CRA looks at the party you really provide services to, and that may be the end client.
• “I had two clients this year, so I am fine.” Other clients help show you run your own business, but CRA still looks at how each engagement actually works.
• “Status is decided once.” It is tested year by year. Facts can change when a contract renews or the end client changes its rules.

How can a CPA help with the definition question?

I cannot tell you from a blog post whether your corporation carries on a PSB. That depends on your contract and how you actually work, year by year. What we can do is look at it properly.

We review your contract and working facts as part of tax planning. We go through each piece of the definition, the control indicators, the agency structure and the hours clause. We are accountants, not lawyers, so contract wording is for your lawyer. We also prepare your T2 corporate tax return, keep your bookkeeping, run payroll, file GST/HST, and plan your salary and dividend mix. If CRA asks questions, we act as your corporation’s authorized representative.

No one can promise that CRA will accept your position. We help you reduce the risk, document the facts and support your position. For the wider picture, please read our guide to personal services business risk. For ongoing help with your corporation, see our page for an accountant for IT contractors.

If you bill through your own corporation, please book a consultation and we will look at your facts. We serve incorporated businesses only, on a fixed flat-fee model. You can also call 647-212-9559 or email info@gondaliyacpa.ca, 9AM to 8:30PM, Monday to Sunday.

Frequently asked questions

Is a personal services business the same as being an employee?

No. A PSB is a classification of your corporation’s business for income tax. Your corporation still earns the income and files a T2 return. It loses the small business deduction, pays a combined 44.5% in Ontario, and can deduct only the limited items allowed by section 18(1)(p).

Does owning less than 10% of the shares take me out of the definition?

Only if neither you nor anyone related to you is a specified shareholder. Shares can be held directly or indirectly, and shares held by a spouse or another related person can count. In a one-person IT corporation, this part of the definition is almost always met.

Can an IT contractor with more than one client still carry on a PSB?

Yes. Other clients help show that you run your own business, but they do not settle the question. CRA looks at how each engagement actually works, year by year.

What tax rate applies to PSB income in Ontario?

A combined 44.5%, made up of 33% federal tax and Ontario’s 11.5% general rate. The current small business rate it replaces is 11.2%, which applies from July 1, 2026.

Does the more-than-five-employees exception help a typical IT contractor?

Rarely. It needs more than five full-time employees in the business throughout the year, which means at least six. Whether owners or family members count depends on their real roles, so it needs review.

Can a CPT1 ruling tell me whether my corporation is a PSB?

No. A CPT1 ruling deals with CPP and EI status for a worker. 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.