Tax Tip Thursday

They always come in waves. I don’t know why, but I suddenly have had a flood of people wanting to understand opening a corporation and the implications.

One area of concern is the corporation that only has 1 client.

In some industries, such as the following, it is a more common practice for payers to require individuals to incorporate in order to provide services:

• Real estate, rental and leasing
• Construction
• Trucking
• Transportation and warehousing
• Professional, scientific, and technical services

Quite often banks, especially, will require contract workers to set up a corporation for billing. The big reason for this is it costs the bank or company less – no payroll taxes, no vacation, no EI, no CPP, and no benefits! So it is a big benefit to the bank.

The danger for the individual is that if you only have one client and you are behaving much the same as an employee of the bank, the corporation is seen as a personal services business and the tax rate is almost 50%!

Why Does This Matter?

There are virtually no deductions!

The CRA might consider your corporation to be a personal services business if all these conditions are met:

• You are a specified shareholder, holding a minimum of 10% of shares of your corporation, and you, or someone related to you, is the employee performing services for another business
• Were it not for the corporation you created, the above incorporated employees would be considered an employee of the business receiving the services
• Your corporation does not employ more than 5 full-time employees throughout the tax year, and
• Your corporation’s income is from services performed by the incorporated employee on behalf of the corporation that is not from an associated corporation

There are ways to get around it, but you need to make sure that you are informed before taking on such a venture.

How To Avoid This

Things you can do to mitigate the 50% tax:

• Have more than 1 client and 2 is not really enough either. You should have at least 3 clients and I would suggest more like ½ a dozen. The type of business may not allow for that many and as such, not possible. Each situation is different and all the variables need to be considered
• Have MORE than 5 employees and you can count yourself as one of them, as long as you are set up as an employee of your corporation.
• Pay out all the revenue of the corporation. If you have no net income, there is no tax. Keep in mind there are very few deductions available to a PSB

The expenses that are allow are:

• The salary, wages or other remuneration paid in the year to an incorporated employee of the corporation
• The cost of any benefit or allowance provided to an incorporated employee
• Any amount expended in connection with the selling of property or the negotiating of contracts by the corporation, as long as the amount would have been deductible if it had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount, and
• Legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered

What Happens if I Pretend Not to be a PSB?

Many people ask will they get caught if they just proceed with filing their tax returns under the premise of NOT being a PSB.

The answer to that is – they are cracking down on them and have instituted a pilot program to go after those businesses specifically!

Are You Incorporating?

This is a very common question, and we talk about it often. Just search through the rest of the blog posts and have a read — lots of great info there! But this is a question that has a different answer for every business. It’s not so cut-and-dry. The best thing you can do is give us a call to set up an appointment where we discuss the pros and cons to figure out what solution is best for you.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.