What is a personal services business and why does CRA care if I incorporate as a contractor?

A personal services business, often shortened to PSB, is a specific label the Income Tax Act applies to a corporation set up by someone who provides services to a client but who, if the corporation didn't exist, would reasonably be considered an employee of that client rather than an independent contractor. CRA cares because incorporating can otherwise be used purely to access lower corporate tax rates and a much broader range of business expense deductions than an employee could ever claim, benefits the tax system doesn't intend to extend to someone who is, in substance, just an employee working through a corporate shell.

If your corporation is classified as a PSB, it loses access to the small business tax rate and can only deduct a narrow list of expenses, similar to what an actual employee could claim, rather than the wide range of costs an ordinary active business could write off. CRA looks at the real substance of the working relationship, things like control, who owns the tools, whether there's a genuine chance of profit or risk of loss, and how integrated you are into the client's operations, not simply how the arrangement is labelled on paper.

Anyone incorporating to work mainly or entirely for one client should understand this risk before assuming incorporation alone delivers the usual tax advantages.