PSB Risk Reduction Checklist for Incorporated Contractors
A PSB risk checklist is a yearly review of the facts CRA weighs when it asks whether your Ontario corporation is a personal services business: your contract, how you work, your tools, clients, records and pay. It cannot decide your status. It helps reduce risk and document your position, where the gap is 11.2% vs 44.5%.
Key takeaways
| # | Takeaway |
|---|---|
| 1 | CRA tests the whole working relationship, year by year. No single clause or fact decides PSB status. |
| 2 | On $150,000 of income kept in the corporation, PSB status means $49,950 more tax in one year: 44.5% instead of 11.2%. |
| 3 | Paper only helps when it matches how the work is really done. Never create or change a document after the fact. |
| 4 | Salary paid to you stays deductible even if the corporation is a PSB, so your pay mix changes how much is exposed. |
| 5 | Work through this list once a year with your accountant, and again whenever a contract or end client changes. |
What is PSB risk, in plain words?
A personal services business, or PSB, is defined in section 125(7) of the Income Tax Act. Your corporation is at risk when two things are true.
First, you, as the person doing the work, or someone related to you, own 10% or more of any class of the corporation’s shares, directly or indirectly. That makes you a specified shareholder. The law calls the person doing the work the incorporated employee.
Second, you would reasonably be regarded as an officer or employee of the client if your corporation did not exist.
There are two exceptions. One is a corporation that employs more than five full-time employees in the business throughout the year. That means at least six, full-time, all year. Whether owners or family members count depends on their real roles, so it needs review. The other is income received from a corporation associated with yours. Most one-person contractor corporations fit neither.
If CRA treats your corporation as a PSB, it loses the small business deduction and the 13% federal general rate reduction. It also pays an additional 5% federal tax under section 123.5. The combined Ontario rate becomes 44.5%: 33% federal plus 11.5% Ontario. Section 18(1)(p) then denies most expenses. I cover the full rule on my page about personal services business risk.
What is at stake? A worked example
Here is Example A at current rates. Your corporation keeps $150,000 of income for the year.
| Scenario | Rate | Tax on $150,000 |
|---|---|---|
| Combined Ontario small business rate, from July 1, 2026 | 11.2% | $16,800.00 |
| Blended rate, December 31, 2026 year-end | 11.70% | $17,543.84 |
| Combined Ontario small business rate, income before July 1, 2026 | 12.2% | $18,300.00 |
| PSB rate | 44.5% | $66,750.00 |
| Extra tax as a PSB, compared with 11.2% | 33.3 percentage points | $49,950.00 |
The current comparison is 11.2% vs 44.5%. A December 31, 2026 year-end gets the blended 11.70% because the Ontario rate dropped on July 1, 2026.
Now the other side. Say this checklist and its records take one hour a month, or 12 hours a year. At a billing rate of $95 an hour, that is $1,140 of your time.
I am not saying $1,140 of record keeping saves $49,950. No checklist can promise that. But if CRA asks, your records are how you show what really happened. Without them, you are explaining from memory, years later.
A review can also reach back more than one year. Take a 2025 year with $159,000 of revenue and $9,000 of expenses. Filed at 12.2%, the tax is $18,300. Reassessed as a PSB, the expenses are denied and the tax is $70,755, which is $52,455 more. If the same facts repeat for three years, that is $157,365 before arrears interest. My post on what happens in a PSB reassessment walks through how that builds.
How should you use this PSB risk checklist?
Work through it once a year with your accountant, before your corporation’s year-end. Go through it again when you sign a new contract, renew with a new statement of work, or change end clients. PSB status is tested year by year, and each relationship stands on its own facts.
Be honest about how things really work. A checklist filled in to look good is worse than no checklist. Records must show what actually happened. Never create, backdate or change a document to fit the list.
The tests behind the list come from two court cases, 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, ownership of tools and equipment, chance of profit and risk of loss, and integration. It also looks at hiring helpers, investment and management. CRA guide RC4110, “Employee or Self-Employed?”, sets out how CRA looks at a working relationship.
What is on the PSB risk checklist?
The list has seven groups. Each table shows the item, why it matters, and what to keep on file.
1. Contract and paperwork
| Item | Why it matters | What to keep on file |
|---|---|---|
| Read the full agency contract and every statement of work at each renewal | CRA usually starts with the contract. It shows the terms the parties agreed to. | The signed contract, every statement of work, and every renewal or amendment |
| Confirm your corporation, not you personally, is the party to the contract | The corporation is the business that supplies the services and gets paid for them | The signed contract showing the corporation’s full legal name |
| Note the clauses on hours, location, supervision, termination notice, exclusivity and substitution | These clauses speak to control and integration, the core of the test | A one-page summary of these clauses, updated each year |
| Keep the end client’s onboarding documents | In a three-party arrangement, the end client’s rules matter as much as the agency contract | Policies, codes of conduct and access rules you signed or acknowledged |
| Bill through numbered corporate invoices | Invoices from the corporation support that the corporation, not you, supplies the services | Every invoice, numbered in order, with GST/HST shown |
We are accountants, not lawyers. If a clause needs new wording, that is for your lawyer. We review your contract and working facts as part of tax planning, and my page on PSB contract review explains how we read them. My post on the contract clauses that raise PSB risk goes through the common ones.
2. How the work is actually done
| Item | Why it matters | What to keep on file |
|---|---|---|
| Who decides what you work on, how and when | Control is a main factor. Being told how to do the work points toward employment. | Statements of work, deliverable lists and emails that set the scope |
| Your hours and schedule | Fixed hours of 35, 37.5 or 40 a week, set schedules and timesheet approval by the end client are control indicators. Hours alone never decide status. | Timesheets, approvals, and notes on any real flexibility you use |
| How your work is reviewed | Sign-off on deliverables looks like a business result. Staff-style performance reviews look like employment. | Emails or notes showing how work is accepted |
| How you appear inside the client | Integration asks whether the work is part of the client’s business or your own. Staff titles and a place on the org chart point toward employment. | Your badge type, your title, and how you are listed in client systems |
| Whether you can use helpers or a substitute | The freedom to hire help points toward your own business. A clause that says only you may do the work points the other way. | The clause, plus contracts and invoices for any subcontractor you used |
Contract wording and daily reality must match. If the contract says you control your schedule but the end client approves every hour, CRA will look at what actually happens.
3. Tools and costs
| Item | Why it matters | What to keep on file |
|---|---|---|
| Laptop, software and home office | Ownership of tools and equipment is a factor. Client-supplied laptops and VPN-only access are control indicators. | Purchase receipts, software licence invoices and a list of equipment the corporation owns |
| Training, certifications and professional dues | Costs your corporation carries show investment in its own business | Invoices paid from the corporate bank account |
| Business insurance | Carrying your own risk points toward a business | The policy and proof of payment |
| Travel and onsite costs | Who pays, and whether you carry costs you cannot recover, speaks to risk of loss | Expense records and receipts |
Keep these receipts either way. They support the deductions you claim and show your investment. If PSB applies, section 18(1)(p) denies costs such as rent, software, equipment, travel, phone, insurance and accounting fees.
4. Clients and marketing
| Item | Why it matters | What to keep on file |
|---|---|---|
| How many clients the corporation served this year | Serving more than one client shows a business open to the market | Invoices and contracts by client |
| What you did to find work | Marketing and proposals show you are in business on your own account | Proposals, quotes, your website and marketing costs |
| Exclusivity and non-compete limits | A contract that blocks other work makes an independent business harder to show | The clause, and any other work you took on within its limits |
| Work you bid on or turned down | It shows you choose your clients and your terms | Emails and proposals, including those that did not close |
5. Money and records
| Item | Why it matters | What to keep on file |
|---|---|---|
| A separate corporate bank account | All income in and all business costs out of one account shows a real business. CRA usually asks for records in a review. | Monthly bank statements and reconciliations |
| How your rate was set | A negotiated rate or fixed-price work shows a chance of profit. A fixed hourly rate with no risk points toward employment. | Rate emails, quotes and any fixed-price agreements |
| Risk of loss | Unpaid invoices, rework at your own cost and liability you carry show a business at risk | Records of bad debts, rework and claims |
| Bookkeeping and GST/HST kept current | Current books support every figure on your T2 and GST/HST returns | Books, GST/HST returns and filing confirmations |
| Who owns the shares | The test asks whether you, or a person related to you, own 10% or more of any class of shares, directly or indirectly | Share register and minute book, kept current |
6. Pay mix
| Item | Why it matters | What to keep on file |
|---|---|---|
| Salary paid to you | Salary to the incorporated employee stays deductible under section 18(1)(p), even if the corporation is a PSB | Payroll records, remittances, T4 slips and the resolution approving the salary |
| Income kept in the corporation | The more income stays inside, the more is exposed to 44.5% if PSB applies | The year-end tax plan showing retained income |
| Dividends paid | PSB income is taxed at the full rate and adds to the general rate income pool (GRIP), so dividends from it can be designated eligible | Dividend resolutions and the GRIP balance |
Salary does not change whether the corporation is a PSB. It changes how much income is left to be taxed at 44.5%. Take Example B: revenue of $171,000, expenses of $9,000, no salary, a full year at 11.2%. If the corporation is not a PSB, the tax is $18,144. If it is, the expenses are denied and all $171,000 is taxed at 44.5%, which is $76,095. The extra tax is $57,951.
Now Example C, the same facts with a $120,000 salary paid to you. Not a PSB, the corporate tax is $4,704. As a PSB, it is $22,695. The extra drops to $17,991. Employer CPP is left out, and the personal tax on the salary is not shown. Salary is taxed in your hands, so this is a planning question, not a free saving.
Integration also leaves a gap. Take $100,000 of PSB income and the top 2026 Ontario rates. The corporation pays $44,500 at 44.5%. The $55,500 left is paid as an eligible dividend, taxed at 39.34%, which is $21,833.70. That is $66,333.70 in total, or 66.33%. The same $100,000 paid as salary at 53.53% costs $53,530. The PSB route costs $12,803.70 more.
7. Annual review
| Item | Why it matters | What to keep on file |
|---|---|---|
| A yearly meeting with your accountant before year-end | Facts change, and PSB status is tested year by year | Dated notes of the review and this checklist |
| Every new contract, renewal or change of end client | Each relationship is tested on its own facts | The new contract and an updated clause summary |
| Staff count, if you employ people | The exception needs more than five full-time employees throughout the year. Who counts needs review. | Payroll records for each employee for the full year |
| Any CRA letter or questionnaire | Your answers become part of the file and are hard to correct later | Every CRA letter, your replies and the dates sent |
| Whether a CPT1 ruling is worth asking about | A CPT1 deals with CPP and EI status, not PSB for income tax, though CRA looks at similar facts | Our notes on whether it is useful in your facts |
What does this checklist not do?
It does not decide PSB status. CRA weighs the whole relationship, and the same facts can be read in more than one way. A clean checklist helps reduce risk and document your position. It is not a ruling.
It does not replace legal advice. If your contract needs new wording, please speak with your lawyer.
It does not fix a relationship that is employment in substance. If the facts point strongly that way, plan for it, including your pay mix.
How do we work through the checklist with you?
Our office is at 55 Queen St E, Suite 1205. If you are in the GTA, my page for an incorporated contractor accountant in Toronto explains how we work locally. Meetings can be in person or online.
Each year we prepare your T2, keep your books, run salary payroll, file GST/HST and plan your salary and dividend mix. We review your contract and working facts as part of tax planning, and we go through this checklist with you. If CRA writes, we act as your corporation’s authorized representative, respond to requests and questionnaires, and organize your documents.
Please book a consultation and bring your contract, your last T2 and your notes on this list. We will go through them item by item. You can also call 647-212-9559, 9AM to 8:30PM, Monday to Sunday.
Frequently asked questions
How often should I go through a PSB risk checklist?
Once a year, ideally before your corporation’s year-end, and again whenever you sign a new contract, renew with a new statement of work, or change end clients. PSB status is tested year by year.
If I complete the checklist, is my corporation safe from PSB status?
No. The checklist helps reduce risk and document your position. CRA looks at the whole working relationship each year, and no single document or clause decides the outcome.
What records matter most if CRA asks about PSB?
Your contract and statements of work, numbered invoices, corporate bank statements, equipment and software receipts, evidence of other clients and marketing, payroll records and every CRA letter with your replies.
Does paying myself a salary reduce PSB risk?
Salary does not change whether the corporation is a PSB. It does stay deductible under section 18(1)(p), so it reduces the income taxed at 44.5%. Salary is taxed in your hands, so the mix needs planning.
Can I lower PSB risk by changing my contract wording?
Wording helps only when it matches how the work is really done. CRA looks at the actual relationship. We are accountants, not lawyers, so any change to contract wording is for your lawyer.
Should I ask CRA for a CPT1 ruling?
A CPT1 asks CRA to rule on CPP and EI status. It is not a PSB ruling for income tax, though CRA looks at similar facts. We review whether it is useful in your facts before you decide.
Sharad Gondaliya is a CPA Canada & CPA USA with 15 Years+ experience of Accounting, Tax, Payroll of Corporate Small Businesses as Tax Accountant. He is a CPA Ontario member (61040184) and holds US CPA licences in Washington and Montana and is well known among corporate small businesses for tax planning, efficient tax solutions, and affordable CPA services. Sharad is the Principal (Director) of Gondaliya CPA – Affordable CPA Firm in Canada. Licenses: CPA Ontario: 61040184 | CPA USA (MT): PAC-CPAP-LIC-033176 | CPA USA (WA): 57629 | CPA Firm License: 61330051 View Full Author Bio