PSB Contractor Tax

PERSONAL SERVICE BUSINESS TAX OF CONTRACTORS

The current federal tax regime was altered by the federal government to increase the tax burden imposed upon contractors and consultants who conduct their business operations through a corporation and that corporation is deemed to be a personal service company / personal service business (PSB).

These adverse legislative changes came about when the Canadian Minister of Finance brought forth specific technical income tax amendments that were included in Bill C-48 (Technical Tax Amendments Act, 2014) that became law on June 26, 2014. The Technical Tax Amendments Act amended the definition of a corporation's “full rate taxable income” in subsection 123.4(1) of the Income Tax Act (Canada) to exclude income earned by a corporation from a Personal Service Business. The effect of this amendment precludes the income earned by a Personal Service Corporation from being eligible for the general Canadian federal corporate tax rate reduction pursuant to subsection 123.4(2) of the Income Tax Act (Canada). [link to Tax Court extracts on PSBs]

The effect of this preclusion, is that the income earned by a corporation from a Personal Service Business for taxation years that begin after October 31, 2014 (the date that the legislative change was first introduced by the Minister of Finance) will be taxed at the basic Canadian federal corporate tax rate of 28% (assuming the provincial abatement is available such that the basic Canadian federal corporate tax rate is reduced from 38% to 28%) and will no longer be entitled to the 13% general Canadian federal corporate tax reduction. The financial significance of this change is considerable, as one's business accountant can clearly demonstrate.

As such, in light of these drastic changes, it is important to understand the legal and tax implications to your business operations, such that appropriate legal advice and structuring is undertaken to deal with your specific situation. Therefore, if you are a contractor or consultant in Alberta, and are looking for advice and/or structural planning for your business operations in light of the Technical Tax Amendments Act, 2014 and its impact should one's business be construed as a Personal Service Business, contact lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092.