So you’ve gone out on your own and created a small business that you can be proud of. Kudos to you. But what you might not realize is that at any time, the Canada Revenue Agency could take that away by declaring you a personal services business instead of a small business, and this kind of hit isn’t easy to recover from. A personal services business is simply a business that performs services for a company that would usually be performed by an employee of that company itself, but it can mean a world of difference in the eyes of the CRA.
Read on for tax advice that shows exactly why you want to avoid being labeled a personal services business, and what you can do to avoid it to protect you and your business.
1. Employee Relationship
One of the hallmarks of a personal services business is acting like an employee to the company you are providing a service. If the company tells you what to do and how to do it or provides training, chances are you’ll be considered an employee in the eyes of the CRA. But if you pick and choose what work you do and decide how that work is performed, then you have more of a business relationship that the CRA will have a tough time disputing. Either way, expanding your business to service more clients will give you more of a leg to stand on should the CRA come knocking at your door, which is not only smart tax advice but also just good business sense.
2. Small Business Deduction
One of the worst side effects of being labeled a personal services business? Losing the small business tax deduction. Any tax advice guru worth their salt will tell you how valuable this deduction is. It gives small businesses a tax break on the first $500,000 of business income, but this reduced tax rate isn’t given to personal services businesses because they’re considered an incorporated employee. They pay the full tax on their entire income, which can make a significant difference for smaller operations.
3. Other Tax Deductions
Another issue with being labeled a personal services business is that you’re not allowed to claim business expenses like other companies. This means that genuine business costs like supplies, office space, and more can’t be written off and instead come straight out of your business income, which can make a huge difference for smaller businesses.
4. Possible Reassessment
You might have been a small business for years, but at any time the CRA could declare you a personal services business and this could apply retroactively, which is just as dire as it sounds. This could mean a reassessment and a devastating tax bill because of misfiling your taxes for years and claiming the small business Deduction as well as expenses.
For some businesses, this sudden bill could prove crippling, which makes it more important than ever to avoid being declared a personal services business and getting legitimate tax advice. Get more small business tax advice by contacting me. Keeping you in the green, and out of the red is my business.