The More-Than-5-Employees PSB Exception: Who Qualifies and Who Does Not

The PSB employee exception applies only if your corporation employs in the business, throughout the year, more than five full-time employees. That means at least six full-time people for the whole year. Part-time staff and subcontractors do not count. For a solo Ontario contractor facing 44.5% instead of 11.2%, it rarely helps.

Key takeaways

What is the PSB employee exception?

A personal services business (PSB) is defined in section 125(7) of the Income Tax Act. In plain words, your corporation can be a PSB when you perform the services (you are the “incorporated employee”), you or a related person own 10% or more of any class of its shares, directly or indirectly, and you would reasonably be regarded as an officer or employee of the client if the corporation did not exist. I explain the full test on our page about PSB risk for incorporated contractors.

The same definition has two exceptions. Even if the facts look like employment, the business is not a PSB if:

1. the corporation employs in the business, throughout the year, more than five full-time employees, or
2. the amount paid for the services is received from a corporation associated with it in the year.

This post is mostly about the first one, the employee exception. I cover the associated corporation exception near the end.

Why does it matter? Because the PSB rate is harsh. In Ontario, PSB income is taxed at a combined 44.5%. Income that gets the small business deduction is taxed at 11.2% from July 1, 2026. Income earned before July 1, 2026 was taxed at 12.2%, so a corporation with a December 31, 2026 year-end gets a blended 11.70% for 2026. Our post on the PSB tax rate in Ontario shows how the 44.5% is built up.

When the exception applies, none of that PSB treatment applies to the business. That is why people ask about it. But the conditions are strict, and each word matters.

What does “more than five full-time employees” mean?

The test has four parts. All four must be met.

More than five means at least six

Five is not enough. The law says more than five, so the corporation needs at least six full-time employees. A corporation with exactly five full-time employees does not qualify, however busy they are.

Full-time, not part-time

Each of the six must be a full-time employee. Part-time staff do not meet the full-time requirement, even if you have many of them.

The Income Tax Act does not set a number of hours for full-time. So we look at the facts: the hours actually worked, the employment terms, the payroll records and the job duties. A role that is full-time on paper but not in practice is a weak position.

Throughout the year, not just at year-end

The count must hold throughout the taxation year. Having six full-time employees in December does not help if you had two in March. If someone leaves and is replaced later, the gap can break the count. So turnover during the year needs review, not just the headcount on the last day.

The test is applied year by year. A corporation can meet it one year and miss it the next.

Employed in the business, by your corporation

The employees must be employed by your corporation, in the business. People employed by the staffing agency or by the end client are not your employees, even if you work side by side with them every day. Workers paid through another corporation are not your corporation’s employees either.

They are employees, not contractors. If you send overflow work to another developer’s corporation, that corporation is your subcontractor. It does not count.

Who counts toward the six, and who does not?

Here is how I look at the people most contractor corporations ask about.

The last two rows are where most of the questions come from, so I will take them one at a time.

Do the owner and family members count?

The law does not answer this in a single line, and I will not pretend it does. Whether an owner or a family member counts depends on what they actually do.

For you, as owner, the question is whether you are genuinely a full-time employee of your own corporation working in the business, alongside the others. For a solo contractor, this question rarely matters. Even if you counted, you would still need five more full-time employees.

For a spouse, a parent or an adult child on payroll, we look at real work. What do they do? How many hours? Is the pay reasonable for that work? Are there timesheets, a job description and regular payroll? Putting family on payroll with a title and no real full-time role does not meet the test, and it creates other tax problems. Salary paid to a family member also has to be reasonable for the work to be deductible.

So my answer is always the same: it needs review of the real roles, with records to support them.

Why does the exception rarely help a solo IT or finance contractor?

Most of the IT and finance contractors I work with run a one-person corporation. A developer, cloud engineer, FP&A analyst or controller bills through an agency on a 35, 37.5 or 40 hour contract. There are no employees. Sometimes there is a bookkeeper or an accountant on contract, and those do not count either.

To use the exception, that corporation would need six full-time employees working in the business all year. That is a different business. It is a consulting firm or a staffing company with a team on payroll. If that is what you are building, the exception can be real. If you are one person on one contract, it is not a practical answer.

The worked example: six employees vs $49,950

Here are the numbers. Start with Example A: a corporation with $150,000 of retained income, with a full year at 11.2%.

• Not a PSB, at 11.2%: $150,000 x 11.2% = $16,800.
• PSB, at 44.5%: $150,000 x 44.5% = $66,750.
• Extra tax if CRA treats it as a PSB: $66,750 less $16,800 = $49,950.

Now suppose you hired six full-time employees, each paid a salary of $50,000, just to meet the test.

• Six salaries: 6 x $50,000 = $300,000 a year.
• That is $250,050 more than the $49,950 of extra PSB tax.
• A single employee at $50,000 costs $50 more than the whole $49,950.

Salaries are deductible, but that does not change the picture. Even if every dollar of salary saved tax at 11.2%, the saving would be $33,600. The net cost would still be $266,400 a year, which is $216,450 more than the PSB tax at stake. These figures are before employer CPP and EI contributions, benefits and the cost of running payroll, which all add to the bill.

There is also the work itself. Six full-time staff on 37.5-hour weeks are paid for 11,700 hours a year (6 x 37.5 x 52). You bill 1,800 hours yourself (37.5 x 48). Those 11,700 hours have to be real work in the business, not hours created to pass a test. Hiring only makes sense if those people bring in more revenue than they cost.

With a December 31, 2026 year-end, the not-PSB tax for 2026 at the blended 11.70% is $17,543.84, so the extra PSB tax is $49,206.16. The conclusion does not change. For a solo contractor, the employee exception costs far more than the tax it protects against.

What is the associated corporation exception?

The second exception is narrower than most people expect. A business is not a PSB if the amount paid for the services is received from a corporation that is associated with your corporation in the year.

Association is a technical test in section 256 of the Income Tax Act. In broad terms, it is about common control, for example two corporations controlled by the same person or group. If your corporation provides services to another corporation you control, the fees it receives from that corporation can fall under this exception.

It does not help in the usual contractor setup. The staffing agency is not associated with your corporation. The bank, insurer or government department at the end of the chain is not associated with it either. So fees from those clients do not qualify.

Two more points. The exception turns on who pays for the services. Fees from an agency or an unrelated client are not received from an associated corporation. And associated corporations share one $500,000 small business limit. A structure built to create association can reduce the small business deduction available to each corporation. Any plan here needs review of the full group, not just one corporation.

What should a solo contractor focus on instead?

If neither exception fits, the PSB question goes back to the main test: would you reasonably be regarded as an employee of the client if your corporation did not exist? CRA looks at the whole working relationship, year by year. Control, tools and equipment, chance of profit and risk of loss, and whether the work is part of the client’s business or your own all matter. Hours alone never decide it.

That is where your effort is better spent. Practical steps include:

• Know what your agency contract and the end client’s onboarding rules actually say.
• Keep records that show how you really work: your own equipment, other clients, business costs, and how you find new work.
• Keep your corporation’s books, T2 returns and payroll records clean and on time.
• Plan salary and dividends with the PSB downside in mind, since salary paid in the year to you is still deductible under 18(1)(p) if CRA ever reassesses.

Our PSB risk checklist walks through these steps in more detail. None of them can promise an outcome. They reduce risk and help support your position if CRA asks questions.

If CRA does send a questionnaire or opens a file, our page on CRA PSB review explains what to expect and how we act as your corporation’s authorized representative.

How can we help with the PSB employee exception?

We review your contract and working facts as part of tax planning. If you have staff, we look at who is on payroll, their real roles and hours, and whether the count holds throughout the year. If you work alone, we tell you plainly that the exception is not your answer, and we focus on the parts of your setup that reduce risk. We are accountants, not lawyers, so any change to contract wording is for your lawyer.

We also handle the routine work behind your position: bookkeeping, payroll and T4 slips, GST/HST filings and your T2 return. Our page for an accountant for IT contractors explains how that works across the year. We work with incorporated businesses only, on a fixed flat fee.

If you are not sure whether your corporation meets the PSB employee exception, please book a consultation. Please bring your payroll records and your current contract, and we will go through them with you.

Frequently asked questions

What is the PSB employee exception?

It is one of two exceptions in the personal services business definition in section 125(7) of the Income Tax Act. A business is not a PSB if the corporation employs in the business, throughout the year, more than five full-time employees. That means at least six full-time employees for the whole year.

Do part-time employees or subcontractors count toward the six?

No. The exception requires full-time employees of your corporation. Part-time staff do not meet the full-time requirement. Subcontractors, freelancers and other incorporated contractors are not your employees, so they do not count either.

Do I count as one of the six employees if I own the corporation?

It depends on your real role. The question is whether you are genuinely a full-time employee working in the business alongside the others. It needs review of your actual duties and hours. For a solo contractor it rarely matters, because you would still need five more full-time employees.

Can I put family members on payroll to meet the exception?

Only real, full-time roles can support the count. We look at what each family member actually does, their hours, whether the pay is reasonable for the work, and the records behind it. Family on payroll without a real full-time role does not meet the test and creates other tax problems.

Is it worth hiring six employees to get out of the PSB rules?

For a solo contractor, almost never. Six full-time salaries of $50,000 cost $300,000 a year, against $49,950 of extra PSB tax on $150,000 of retained income. Hiring only makes sense if those employees do real work that brings in more revenue than they cost.

What is the associated corporation exception?

A business is not a PSB if the amount paid for the services is received from a corporation associated with it in the year. Association is a technical common control test in section 256. It does not help a contractor billing a staffing agency or an unrelated bank, insurer or government client.