Introduction
One of the most common structural risks for incorporated consultants, contractors, and professionals is the personal services business (PSB) classification. A corporation that is deemed to be a PSB faces significantly higher corporate tax rates and is denied most of the standard business expense deductions available to other corporations. For an incorporated individual who has set up a corporation primarily to capture the tax advantages of incorporation, a PSB determination can eliminate most of those advantages.
What Is a Personal Services Business?
A personal services business is defined in subsection 125(7) of the Income Tax Act as a business carried on by a corporation where:
An individual who performs services on behalf of the corporation (referred to as the "incorporated employee") is a specified shareholder of the corporation (i.e., owns 10% or more of any class of shares), and
That individual would reasonably be regarded as an officer or employee of the entity to which services are rendered, if the corporation did not exist.
In other words: if stripping away the corporate structure would leave the individual in an employment relationship with the client, the corporation is a PSB.
The "But For" Test
The central question in a PSB analysis is: if this corporation did not exist, would this individual be an employee of the client?
The CRA applies the same multi-factor employment test used for general employee/contractor classification — control, tools, financial risk, integration, exclusivity. A corporation whose owner works exclusively for one client, follows that client's direction, uses the client's equipment, and attends the client's premises on a regular schedule looks like an incorporated employee, regardless of the corporate structure in between.
The Tax Consequences of PSB Status
The consequences of PSB classification are significant:
No small business deduction: A PSB is explicitly excluded from the small business deduction. Instead of paying corporate tax at the small business rate (approximately 12.2% combined in Ontario in 2026), a PSB pays at the general corporate rate (approximately 26.5% combined in Ontario).
Limited expense deductions: A PSB can only deduct the salary and benefits paid to the incorporated employee and certain other costs. The broad range of business expense deductions available to regular corporations — including home office, vehicle, marketing, and similar costs — is denied.
Effectively no benefit: The combination of higher corporate rate and limited deductions means that incorporation provides little or no tax advantage for a PSB. In some cases, the corporation is worse off than simply operating unincorporated.
The Four-or-More Employee Exception
A corporation is not a PSB if it employs more than five full-time employees throughout the year. If the corporation has a genuine business with multiple employees (not just the incorporated individual), it falls outside the PSB definition.
This is why consulting corporations that have genuine staff — project managers, support staff, or additional consultants — are less likely to be classified as PSBs than a sole incorporated consultant with no employees.
Who Is Most at Risk
The PSB rules are most likely to apply to:
Incorporated consultants or contractors who work primarily or exclusively for one client
Professionals who incorporated to reduce tax but continue to work in a relationship that functionally resembles employment
IT contractors and financial services consultants whose billing arrangements look like staffing
Independent salespeople who are "managed" by the client in a way that resembles employment
When to Speak With a CPA
If your corporation earns income primarily from one client, and the nature of that relationship involves direction, supervision, and integration with the client's operations, a CPA should review the PSB risk. Restructuring — by reducing exclusivity, ensuring financial independence, and maintaining genuine business infrastructure — can reduce the risk, but it requires the relationship to genuinely change, not just be documented differently.