An incorporated IT contractor can carry on a personal services business (PSB) if the work would reasonably be employment without the corporation and the other statutory conditions are met. PSB income loses access to the small business deduction and faces restricted expense deductions and an additional federal tax. The contract and day-to-day working facts both need review.
This article explains what a personal services business is, how CRA determines whether one exists, and what the financial consequences look like in practice.
What a Personal Services Business Is
A personal services business is a business carried on by a corporation when all five CRA-listed conditions apply:
- The worker provides services through a corporation.
- The worker, or a related person, is a specified shareholder.
- The corporation employs five or fewer full-time employees in that business throughout the year.
- The corporation is not paid for those services by an associated corporation.
- Without the corporation, the worker would reasonably be considered an employee of the payer.
The final condition requires a fact-specific review of the working relationship. If any condition is absent, that business is not a PSB under this test.
An independent-contractor label in the agreement does not settle the question. CRA considers the contract and how the engagement actually operates.
How CRA Determines PSB Status
CRA considers the corporate conditions separately, then examines whether the worker would reasonably be considered an employee of the payer if the corporation did not exist. The working-relationship factors below organize evidence; they are not a score.
Control. Does the client direct how and when the work is done? A contractor who works set hours established by the client, follows internal processes, and reports through a management structure looks more like an employee than an independent business.
Tools and equipment. Who supplies the equipment? Client equipment may reflect security or compatibility requirements. The reason and wider cost structure matter.
Chance of profit and risk of loss. Does the contractor have real financial exposure? Hourly billing alone does not settle this question. Review actual cost exposure and delivery obligations. A contractor who bears the cost of errors, provides their own insurance, and accepts financial risk for project outcomes has a stronger independent business case.
Integration. Is the work integral to the client’s core business operations? A contractor performing functions that would otherwise be handled by an employee is more likely to be seen as integrated into the client’s business than one providing a specialized service at arm’s length.
No single factor is determinative. CRA looks at the full picture, and the weight given to each factor depends on the circumstances.
Risk Factors in Practice
Certain arrangements can make the employee-like condition more plausible. Facts worth reviewing for PSB classification include:
- One primary client generating most or all of the corporation’s revenue
- Work performed at the client’s location using the client’s equipment
- Hours and scheduling set by the client rather than negotiated by project
- No ability to subcontract work or send a replacement
- Contract language limiting the contractor to one client or one project at a time
- Extended engagement with a single client with no break or competitive bid
None of these factors alone creates a PSB determination, and they do not establish the probability of a CRA review. Their significance depends on the whole engagement and the other statutory PSB conditions. The cybersecurity engagements guide, the Ottawa federal government contracting guide, and the employment-status versus PSB comparison examine related situations.
What a PSB Determination Costs
The financial consequences operate on two levels: the corporate tax rate and the deductible expenses.
Corporate tax rate. PSB income does not qualify for the small business deduction or general corporate tax rate reduction, and an additional 5% federal tax applies. For taxable PSB income allocated to Ontario, the standard combined corporate income tax rate is 44.5%: 33% federal plus 11.5% Ontario. This applies to taxable PSB income, not every dollar of revenue. Actual tax depends on the taxation year, provincial allocation, eligible deductions and other circumstances. Personal tax may also apply on dividends. CRA PSB fact sheet; CRA corporate rates. Last reviewed: 10 October 2026.
Deductible expenses. A PSB is restricted in what it can deduct. CRA lists salary and wages paid to the incorporated employee, benefits or allowances provided to that employee, certain expenses associated with selling property or negotiating contracts, and legal expenses incurred to collect amounts owing.
Ordinary contractor deductions cannot simply be carried over to PSB income. Expenses such as a home office, vehicle use, or professional development need to be checked against the narrow statutory exceptions rather than assumed deductible.
A retroactive determination compounds the impact. CRA can reassess past years, which can affect tax and deductions in prior years still within the reassessment window.
What Does Not Resolve the Risk
Two things that often appear in contractor files but do not, on their own, reduce PSB risk.
A contract that uses independent contractor language. The terms of the agreement matter, but they are not controlling. CRA assesses them alongside the actual working arrangement. A contract can say “independent contractor” while the day-to-day relationship looks like employment.
Incorporation itself. Incorporating does not establish independence. The PSB rules exist specifically because the corporate form was being used to create tax advantages in arrangements that CRA determined were fundamentally employment relationships.
The Point at Which This Becomes Relevant
The PSB question should be analyzed before incorporating, not after. The decision to incorporate and the structure of the engagement with a primary client are connected. If the working arrangement would not survive a PSB analysis, the tax advantage of the corporate structure may not materialize.
For contractors already incorporated with one primary client, reviewing the arrangement and assessing the risk is the first step. Some risk factors are within the contractor’s control: expanding the client base, supplying their own tools and equipment, and structuring engagements around deliverables rather than hourly commitments. Others depend on the client’s practices.
Changing a clause or buying equipment by itself does not change the underlying relationship. Review what the contractor and payer actually do before drawing a conclusion.
For incorporated IT contractors, a PSB review starts with the statutory conditions, then examines the contract and actual working practices for each relevant engagement. The PSB risk review service explains the fact review and provides a preliminary questionnaire. If you already know the issue you want assessed, send a PSB enquiry with the client arrangement and timing. Scope and fees are agreed before professional work begins.