Personal Services Business: What Consultants Need to Know

What Is a Personal Services Business?

The CRA may consider a corporation to be carrying on a PSB when an individual provides services to a client through a corporation, but based on the actual working relationship, the individual would reasonably be considered an employee of that client if the corporation did not exist.

Under the CRA’s current guidance, a corporation is likely operating a PSB when all of these conditions apply:

• you provide services through a corporation;
• you, or a person related to you, are a specified shareholder — generally holding at least 10% of the shares of a class of the corporation;
• the corporation has five or fewer full-time employees throughout the year;
• the payments for the services are not received from an associated corporation; and
• if the corporation did not exist, you would reasonably be considered an employee of the client.

For most owner-managed consulting corporations, the last point is the most important: what does the real working relationship with the client look like?

Does Having One Client Automatically Mean You Have a PSB?

No. Having one major client does not automatically make your corporation a PSB. But it can be one fact that matters when the overall relationship is reviewed.

The CRA looks at the full working relationship. There is no single factor that decides the result. Important factors include control over the work, who provides the tools, whether you have a real opportunity for profit or risk of loss, and how independently you operate.

A Simple Example

Key Factors to Review

Does an “Independent Contractor” Clause Protect You?

Not by itself. A well-written agreement is important, but it should match the way you actually work. If the agreement says you are an independent contractor but the client controls your schedule, process, and working conditions in practice, the wording alone is not enough.

What Happens If Your Corporation Is a PSB?

The main consequence is that the tax treatment can be much less favourable than for a regular small business corporation.

• a PSB cannot claim the Small Business Deduction;
• a PSB cannot claim the general corporate tax rate reduction;
• PSB income is subject to the full federal and provincial corporate tax rates, plus an additional 5% federal tax on PSB income; and
• the range of deductible expenses is much narrower than for a regular corporation.

The CRA allows a PSB to deduct only certain expenses, including salary, wages, or other remuneration paid to the incorporated employee, certain benefits or allowances, certain expenses related to selling property or negotiating contracts, and legal expenses incurred to collect amounts owed for services. This means many ordinary business expenses may not be deductible.

A PSB still files a T2 Corporation Income Tax Return. GST/HST obligations also continue to apply when required. If the corporation pays salary or wages to employees, including the owner when they are an employee of the corporation, normal payroll and T4 obligations apply.

What’s New: CRA Is Paying More Attention to PSBs

In 2026, the CRA published updated PSB guidance and results from its Personal Services Business Pilot. The pilot results do not represent all Canadian corporations, but they show why the CRA continues to focus on PSB compliance.

• In Phase 2, 913 corporations agreed to a voluntary review, and 291 of them (32%) were determined to be operating as a PSB.
• Among the confirmed PSBs, 84% had claimed the Small Business Deduction and had not included the additional 5% tax on PSB income.
• 29% of the confirmed PSBs said their hiring company had told them to incorporate.
• Across the two phases of the pilot, the CRA identified significant PSB activity in transportation and warehousing, professional, scientific and technical services, and construction.

This is especially relevant for consultants: professional, scientific and technical services were one of the main sectors represented in the CRA pilot.

My Client Asked Me to Incorporate. Is That a Problem?

Not necessarily. The fact that a client prefers to work with a corporation does not automatically make the corporation a PSB. But incorporating does not turn an employment-like relationship into an independent business.

If nothing really changes after incorporation — the same control, the same schedule, the client’s tools, and little or no business risk — it is worth reviewing the PSB rules before filing the T2 as a regular small business corporation.

What to Do If You See a PSB Risk

The goal is not to make the relationship look different on paper. The first step is to understand what your working arrangement actually is.

1. Review the real working relationship with your main client: control, schedule, tools, ability to delegate, and financial risk.
2. Compare the actual working arrangement with what your contract says.
3. Before filing the T2, make sure the corporation is using the correct tax treatment and is not claiming the Small Business Deduction if it is not eligible.
4. If you believe previous T2 returns may have been filed incorrectly, discuss correction options with your accountant. Depending on the situation, you may be able to request a reassessment or consider whether the CRA’s Voluntary Disclosures Program is available.

What Comes Next?

PSB is not simply a question of whether you have one client. The key question is whether you would look like an employee of that client if the corporation were removed from the relationship.

If you are thinking about incorporating and most of your future income will come from one client, review the PSB rules first. If your corporation already exists, make sure its T2 filings and deductions match its actual status.

For a broader look at the pros and cons of incorporation, see Should I Incorporate My Business in Canada.