What is a Personal Service Business (PSB)? Your corporation may be considered a PSB if you provide services through your corporation to a company to whom you would normally be considered an employee or officer, but for the existence of your corporation. If your corporation has more than 5 employees however, it likely will not be considered a PSB; professionals will also fall under different rules.
In the past, the small business deduction and ordinary business expenses were denied to PSBs; this was done to prevent employees from terminating their contracts of employment with a company and then incorporating a company just to get tax advantages. Still, because corporate rates have been reduced over the past few years, the PSB still provided advantages. The new rules now in force largely curtail those savings.
What Has Changed? Effective for taxation years beginning after October 31, 2011, income from PSBs will be subject to 28% federal tax, as opposed to 15%, as well as the applicable provincial rate.
What Does This Mean for You? Depending on where you live there may still be a small benefit over personal tax rates. If not, however, you’ll need to do some planning: for example, you may wish to “bonus out” all corporate income as salary. Check with your tax professional to do the math