CRA PSB Review: What to Expect, Stage by Stage
A CRA PSB review checks whether your Ontario corporation’s contract income is personal services business income. It usually starts with a letter or call and a questionnaire, then document requests, possibly interviews, a proposal letter and a notice of reassessment. The stake is 44.5% tax instead of 11.2%. We can act as your corporation’s representative.
What is a CRA PSB review?
A CRA PSB review is an audit of your corporation’s tax return that turns on one question: was the income from a personal services business (PSB)?
Most of the contractors I work with are IT and finance professionals. They bill through their own Ontario corporation, often through a staffing agency, for a bank, an insurer, a government or a large enterprise. That setup is legal and common. It is also the kind of arrangement the PSB rules were written for.
Section 125(7) of the Income Tax Act sets two conditions for a PSB in a year. You, the person doing the work, or someone related to you must be a specified shareholder, which means owning 10% or more of any class of shares, directly or indirectly. And you must reasonably be regarded as an officer or employee of the client if your corporation were not there. Two exceptions can apply: the corporation employs more than five full-time employees in the business throughout the year, or the income is received from an associated corporation. Whether either one fits needs review on the facts.
A one-person contractor corporation usually meets the first part, because you own the shares. So the review is really about the second part. To answer it, CRA uses the tests 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. CRA looks at control, who owns the tools and equipment, your chance of profit and risk of loss, and whether your work is part of the client’s business or your own. It also looks at hiring helpers, investment and management. The whole relationship is tested, year by year.
I explain the definition, the tests and the exceptions in more detail on our page about personal services business risk.
What is at stake if CRA decides your corporation is a PSB?
From July 1, 2026, the combined Ontario small business rate is 11.2%. PSB income does not get the small business deduction or the 13% federal general rate reduction, and it pays an additional 5% federal tax under section 123.5. The combined Ontario PSB rate is 44.5%.
A review looks at returns you have already filed, so earlier rates matter too. Income earned before July 1, 2026 was taxed at 12.2%. A taxation year ending December 31, 2026 gets a blended 11.70%.
Section 18(1)(p) also denies most expenses for a PSB. Salary and benefits paid to you stay deductible. Costs such as rent, software, equipment, travel, phone, insurance and accounting fees do not.
Here is one example for a 2025 year. The corporation billed $159,000 and had $9,000 of expenses. As filed, it paid $18,300, which is 12.2% of $150,000. Reassessed as a PSB, it pays $70,755, which is 44.5% of the full $159,000. That is $52,455 more for one year, before arrears interest. You can test your own numbers with our PSB tax cost calculator.
What are the stages of a CRA PSB review?
Every file is different, but a CRA PSB review usually moves through five stages. Here is what each one looks like in plain words.
First contact: a letter or a call
The review usually starts with a letter, or a call from an auditor followed by a letter. It names your corporation and the years under review. It often includes a questionnaire about the working relationship: who sets your hours, who approves your time, whose laptop you use, whether you could send someone else to do the work, and whether you have other clients.
If someone calls saying they are from CRA, please do not share details until you have confirmed the call is genuine. Ask for the auditor’s name and phone number, and send them to us.
Do not rush the questionnaire. Each answer is a fact CRA will rely on. Short, accurate answers backed by documents work better than long explanations.
Requests for documents
CRA then asks for records. For a contractor corporation, the usual list is the agency agreement, statements of work, invoices, timesheets, onboarding emails from the end client, details of the equipment you use and who paid for it, and a list of other clients. The auditor may also ask for the general ledger and bank statements, as in any corporate audit.
The documents often say more than the questionnaire. An onboarding email that sets your daily stand-up, your reporting line and your required office days can say more about control than a clause that calls you an independent contractor.
Interviews
The auditor may ask to interview you. The questions usually follow the same tests: what a normal week looks like, who supervises you, who decides how the work is done, who pays for tools, and what happens if work is late or wrong. CRA may also contact the agency or the end client for their view of the relationship. We set up the interview with the auditor in advance, go through the facts with you beforehand, and attend it with you as the corporation’s representative.
The proposal letter
If the auditor believes the income was from a PSB, CRA sends a proposal letter. It sets out the changes CRA plans to make, the years, the amounts and the reasons. It also states a deadline to respond. This is the stage to point out facts or documents the auditor has not considered, and to check the numbers. Please note the deadline the day the letter arrives.
The notice of reassessment
If CRA does not change its view after the response, it issues a notice of reassessment for each year it changes. The notice shows the revised tax, the balance owing and arrears interest. A notice of objection is generally due within 90 days of the date on the notice of reassessment. That is a later stage in the CRA process.
For a Canadian-controlled private corporation, CRA can generally reassess a year within three years of the date of the original notice of assessment for that year. Some situations extend that period.
What does CRA ask for at each stage, and what do we prepare with you?
| Stage | What CRA usually asks for | What we prepare with you |
|---|---|---|
| First contact | A contact person for the corporation and answers to a working-relationship questionnaire | Our authorization as the corporation’s representative, and draft answers built from your facts for you to confirm |
| Request for documents | Agency agreement, statements of work, invoices, timesheets, onboarding emails, equipment details and a list of other clients | An organized, indexed document package, with invoices matched to the books and any missing items noted |
| Interview | A walk through a normal week: supervision, schedule, tools, risk and other work | A review of the facts and documents with you before the interview, contact with the auditor about scope and timing, and attendance with you at the interview |
| Proposal letter | A written response by the deadline stated in the letter | A line-by-line review of the proposed changes and a written response sent before the deadline |
| Notice of reassessment | Payment of the balance owing, including arrears interest | A check of the notice against the proposal letter, and a plain explanation of each amount and date |
How do we support your corporation during a CRA PSB review?
Our support in a PSB review is the same CRA audit support and representation work we do for incorporated businesses. In practice, that means:
- You authorize us as the corporation’s representative with CRA, so the auditor can deal with us directly.
- We organize the documents into a clear, indexed package.
- We respond to CRA requests and questionnaires, using facts you have confirmed.
- We communicate with the auditor, so you are not handling the calls and letters alone.
- We review the proposal letter, check every number in it, and respond in writing before the deadline.
We do not change facts. Our job is to make sure CRA sees the real facts clearly, with the documents that support them. I cannot promise how CRA will decide, and no honest adviser can.
We are accountants, not lawyers. Contract wording is for your lawyer. If you want to see how contract clauses are read for PSB indicators, our page on PSB contract review explains it. For how we handle CRA audits more generally, please see our page on CRA audit support for small businesses.
We work with incorporated Canadian businesses only. In a PSB review, we act for the corporation.
What should you do first if CRA contacts you?
- Read the letter and note the years under review and any deadline.
- Confirm the contact is genuine before you share anything.
- Do not guess or send partial answers. Gather your agency agreement, statements of work, invoices, timesheets and onboarding emails first.
- Keep your records as they are. Do not rewrite or backdate anything.
- Contact us early, so there is time to organize the documents before the first deadline.
We work with contractor corporations from our office at 55 Queen St E in Toronto. Our page for an incorporated contractor accountant in Toronto explains how we work with contractor corporations through the year, not only when CRA writes.
If CRA has contacted your corporation about PSB status, please book a consultation and bring the CRA letter, your agency agreement and your statements of work. You can also call us at 647-212-9559 or email info@gondaliyacpa.ca, 9AM to 8:30PM, Monday to Sunday.
Frequently asked questions
How does a CRA PSB review usually start?
Usually with a letter, or a call followed by a letter, naming your corporation and the years under review. It often includes a questionnaire about your working relationship: hours, supervision, tools, other clients and who bears the risk.
What documents does CRA usually ask for in a PSB review?
The agency agreement, statements of work, invoices, timesheets, onboarding emails from the end client, details of your equipment and a list of other clients. The auditor may also ask for the general ledger and bank statements.
How long do I have to respond to a CRA proposal letter?
The proposal letter states its own deadline, so please read it the day it arrives. If you need more time, we can ask the auditor before the deadline passes. CRA decides whether to allow it.
What is the deadline after a notice of reassessment?
A notice of objection is generally due within 90 days of the date on the notice of reassessment. Arrears interest applies to the balance owing. Please do not wait until the end of that period to look at your options.
How many years can CRA review?
For a Canadian-controlled private corporation, CRA can generally reassess a year within three years of the date of the original notice of assessment. Some situations extend that period. Each year is tested on its own facts.
Is a CRA PSB review the same as a CPP/EI ruling?
No. Form CPT1 is used to request a CPP/EI ruling on a worker’s status. That ruling deals with CPP and EI, not PSB status for income tax, though CRA looks at similar facts. We review whether it is useful in your facts.
Can you promise CRA will accept our position?
No. Nobody can promise an outcome. We make sure CRA sees the real facts, organized and supported by documents, and we respond to each request and to the proposal letter on time.
Do you represent individuals in a CRA PSB review?
No. We work with incorporated Canadian businesses only, and we do not take individuals or sole proprietors as clients for these services. In a PSB review, we act as the corporation’s representative with CRA.