The 'Personal Services Business' Rule: When an Incorporated Contractor Is Taxed Like an Employee

Incorporating is often sold to independent contractors as a tax-planning move — access to a lower small business tax rate, more control over when income is taken personally, and a more businesslike relationship with clients. But if the CRA decides the incorporated contractor is, in substance, doing the same job as an employee, none of those advantages apply. The personal services business rule strips away the corporate tax benefits a genuine small business would otherwise get.

This article explains what a personal services business is, why the label matters so much for tax purposes, and what pushes a one-person corporation into it.

What a Personal Services Business Is

A personal services business (PSB) exists when a corporation is used to provide the services of an individual — usually the corporation's own owner — to another business, in circumstances where that individual would reasonably be considered an employee of the client if the corporation weren't there. In effect, the CRA looks through the corporate structure and asks: strip away the incorporation, and is this really just an employment relationship?

Why the Question Mirrors the Employee-vs-Contractor Test

The analysis for whether an incorporated worker's corporation is a PSB draws on the same substance-over-form factors used to decide whether any worker is an employee or a contractor: control over how the work gets done, who owns the tools and equipment, whether the individual has a genuine chance of profit and risk of loss, and how integrated the work is into the client's business. Incorporating doesn't change these underlying facts — it just adds a corporate structure on top of them.

What Changes If Your Corporation Is a PSB

As of mid-2026, the federal small business rate is 9% on qualifying active business income up to the annual limit, against a federal general rate of 15%; Ontario layers its own small business and general corporate rates on top of the federal ones. A PSB gets neither the small business rate nor the general rate reduction, and it also loses most of the ordinary expense deductions a genuine small business would claim. The combined effect is that PSB income ends up taxed well beyond what either rate above suggests, with far fewer deductions to offset it. Confirm the current rates with an accountant before relying on any specific figure, since they change from year to year.

Signs That Point Toward PSB Status

• A single client, or one client accounting for most of your income, over an extended period
• Set hours, a set location, or day-to-day direction from the client over how the work gets done
• No real ability to profit from your own business decisions, or bear a loss, the way an independent business would
• Using the client's tools, equipment, software, or workspace rather than your own
• Doing work that's indistinguishable from the work of the client's own employees

Reducing PSB Risk

• Work for multiple clients rather than depending on one
• Keep control over how, when, and where you do the work, where the nature of the engagement allows it
• Invest in and use your own equipment, software, and tools where practical
• Take on genuine business risk — pricing that can produce a profit or a loss, not just a fixed hourly rate
• Put a written agreement in place that reflects how the work actually happens, not just how you'd like it characterized

If the CRA Reassesses Your Corporation as a PSB

A PSB reassessment usually means back corporate tax at the higher rate, denied deductions the corporation already claimed, and interest on the difference. You generally have a limited window to file a Notice of Objection after a reassessment — confirm your specific deadline right away, since it depends on the type of taxpayer involved and starts running from when the notice is sent. Whether to object, and on what basis, depends heavily on the specific facts of how the work was carried out.

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