A PSB exists where, if there were no corporation separating the worker and the payer, the relationship would reasonably be considered to be one of employment.
The consequences of a corporation being assessed as carrying on a PSB are onerous and can include:
In some cases, rather than dispute with CRA, the employer/payer paid the tax bill on behalf of the worker such that the business could continue operations without further human resource and morale issues. Not only is this a risk to ICs, but also to the payers as they need ICs to focus on the work and not a CRA audit or reassessment.
On May 22, 2014 CRA stated at the Ponoka CA/CRA Roundtable meeting that there were currently no national PSB projects. There was no comment on the presence of regional projects.
Since then we have not seen a major project, however; as of late, increased activity in this area has prompted many ICs and payers to take a defensive strategy to possible reassessments.
Some industries that may be at higher risk of a PSB audit include oil and resource extraction, construction, transportation, and Information Technology. Technical consultants (e.g. engineer consultant) and upper management both within and outside these industries may also be at higher risk.
Regular Corporation vs. PSB
How would CRA determine whether a business is a PSB?
To determine whether a business is a PSB or not, CRA will generally apply the same criteria as described in the Employee vs. IC section, with the exception of “intent”. RC4110, http://www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html
Recent Court cases have noted that the intent of the parties may not be relevant when determining whether a worker is carrying on a PSB. Determining whether a corporation is a PSB is a grey area and subject to much interpretation.
Some steps worker corporations may take, if appropriate, to demonstrate that they are not a PSB include:
Doing work for a number of customers. If this is not possible, it may be advantageous to have documents to support that work is being sought outside of the current limited customers list (e.g. a copy from an advertisement from a newspaper, correspondence with potential clients, etc.). As well, documents which demonstrate a history of various customers may also be useful.
• Having a contract with the payer (with no terms similar to that of an ‘employment contract’).
• Engaging in shorter term and project-based contracts.
• Registering for GST/HST.
• Providing invoices.
• Having more than 5 full-time employees involved in the business line.
• Ensuring that characteristics of the contract indicate a “self-employed” status.
As well, some taxpayers are looking to mitigate the downside if assessed as a PSB. In these cases, taxpayers are, for example, choosing to limit deductions in the worker’s corporation to those that would be available to employees (e.g. not deducting meals and entertainment expenses), paying all profit out as salary to oneself, and avoiding income splitting with family members.
Some workers are also resorting to complicated partnership or trust structures that are beyond the scope of this paper.
To appeal an assessment, review CRA publication P148 – Resolving your dispute: Objections and appeal rights under the Income Tax Act.