With the loss of full-time positions, people are forming one-person small businesses and then incorporating for tax advantages and liability protection.
You do not want the CRA to define your corporation as a personal services corporation because you will not be allowed to claim any of the standard business expenses including the Small Business Deduction. The CRA explains this as a person providing services on behalf of the corporation is called an incorporated employee not a contractor.
This makes a big difference to your income tax if you are defined as an employee rather than as a business person, because you will not have the same potential tax deductions as a business person.
The CRA defines a personal services corporation as: "a business that a corporation carries on, to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform" (T4012 – T2 Corporation Income Tax Guide, Chapter 4, Canada Revenue Agency.
The CRA uses four criteria to determine whether a person is an employee or an independent contractor:
For a corporation with only one shareholder doing business for only one company it is hard to prove that they are actually a business and not a personal services corporation. From the government’s point of view, just calling an employee something else does not mean that they are not actually an employee, especially when their duties are exactly what an employee would do.
If you are defined by the CRA as a personal services corporation you run the risk of not only losing your small business tax deduction and other standard business deductions, you may also be subject to reassessment. There is no time limit for reassessment, the CRA can examine your business records and find you owing for years of back taxes.
To avoid being classes as a personal services corporation you need to ensure that you have at least five full-time employees throughout the year and that you provide services to an associated corporation. Unfortunately this is not always possible for a small corporation, so you need to find other ways to prove yourself.
If you work as a contractor make sure that you are fully aware of CRA regulations and their distinction between employees and independent contractors.
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