If CRA reclassifies my corporation as a personal services business, do I owe back taxes?

Yes. If CRA reclassifies your corporation as a personal services business, typically after an audit or review of prior years, it can reassess those earlier years within the normal reassessment period to deny the small business deduction that was claimed and disallow expenses that don't fit within the narrow list a PSB is allowed to deduct. The result is additional corporate tax owing for those years, plus interest, and potentially penalties depending on the circumstances.

Because this often comes to light only after several years of filings built on the assumption that the corporation was a genuine active business, the reassessed amounts can add up to a meaningful sum by the time CRA catches it, the corporation may owe not just one year's difference but several years' worth of the higher tax rate and disallowed deductions all at once.

If your corporation has been operating for years primarily or entirely for one client, reviewing your actual working relationship against the PSB tests now, rather than waiting for CRA to raise it on audit, gives you the chance to address the underlying relationship or plan for the exposure before a reassessment arrives with several years of back taxes attached.