Do you have any incorporated clients who perform the duties of an employee? In certain industries, an individual may choose or be asked to incorporate for work. However, it is important they are aware of how being incorporated can affect their tax obligations. CRA offers the following advice to help your clients know their tax obligations.
If individuals register as a corporation and they are the only shareholder and likely the only employee, they are an incorporated employee. If they’re doing work for another corporation that would normally be done by an employee, the CRA might consider them a personal services business.
Personal services businesses don’t receive the same income tax deductions that are available to other corporations, such as the small business deduction and the general rate reduction. The corporation will be subject to the full federal and provincial tax rates on all taxable income. There is also an additional 5% tax for personal services businesses on their taxable income. The individual will also be responsible for the corporation’s GST/HST obligations as well as providing accurate T4 statements to all employees of the corporation.
In addition, personal services businesses are limited in the expenses they may deduct compared to other corporations. They cannot deduct common expenses including, but not limited to:
- office supplies;
- travel expenses;
- meals; or
- cell phone costs.
The only expenses a personal services business can deduct include the following:
- any salary, wages, benefit, or allowance the corporation pays to its incorporated employee(s); and
- legal expenses the corporation incurs for collecting amounts owing.
If you have clients operating as a personal service business who might have misfiled their tax returns, the voluntary disclosures program might be an option to help correct them if the clients meet the eligibility requirements. For information on reporting requirements for employees, self- employed individuals. and personal services businesses, see withholding and reporting requirements on CRA’s website.