What tax deductions do I lose if my corporation is classified as a personal services business?

If your corporation is classified as a personal services business, it loses access to the small business tax rate entirely, so its income is taxed at a materially less favourable corporate rate than a genuine active business would pay. On top of the rate itself, a PSB corporation can only deduct a narrow, restricted list of expenses, essentially the same limited items an actual employee could claim, such as certain salary or wages paid to an assistant and some specific benefit costs, rather than the much wider range of ordinary business expenses, like general office costs, travel, or a broader set of operating expenses, that a genuine active business could write off.

This combination, a higher effective corporate tax rate plus a far narrower deduction list, can turn what looked like a tax-efficient incorporation into something considerably less advantageous than simply being paid directly as an employee or a genuine independent contractor, once the arrangement is reclassified.

Because both the rate and the deduction restrictions apply together, and because reclassification is often discovered only after several years of filings, understanding this exposure before incorporating for a single, ongoing client relationship is far better than discovering it during a CRA reassessment.