Maharaj & Company

Chartered Accountants Ashwin C. Maharaj Inc.*

A Personal Services Business (PSB) is a corporation where the owner/shareholder provides services to
another business and the owner/shareholder can reasonably be regarded as an employee of the
business. The definition of a PSB excludes an incorporated business that employs more than 5 full-time
employees. If your corporation is considered a PSB, it will not qualify for the small business deduction,
that is, the corporation will be taxed at the highest corporate tax rate. In addition, the deductions the
corporation is allowed to claim is very minimal i.e. salary or wages and expenses that an employee
would be able to claim, e.g. vehicle or travel expenses.

The Canada Revenue Agency generally considers four issues to determine whether a person is an
employee or an independent contractor:

1. Control - The level of control the employer or hirer has over the worker's activities

The primary issue here is whos running the ship. Does the employer have the right to hire or fire,
determine the wage or salary to be paid, and decide on the time, place, and manner in which the
work is to be done? Then an employer-employee relationship exists. Note that if the employer
does not directly control the worker's activities, but has the right to do so, the notion of control still
exists.

On the other hand, in a business relationship, the worker decides how the work will be performed.
As a contractor, then, its important that you maintain the right to decide where, when and how the
work will be done. If it comes to the test, and you can show that you were the person responsible
for planning the work to be done, choosing the hours of work, and/or setting the standards to be
met, for example, youll have a much better chance of being deemed a contractor rather than an
employee.

2. Ownership of tools - Whether the worker provides his or her own equipment

An obvious point, one would think; a contractor would supply his own tools. However, because its
customary for employees to supply their own tools in some trades (think of painters and garage
mechanics, for example), the cost of using the tools is a much better indication, according to the
Canada Revenue Agency, When workers purchase or rent equipment or large tools that require a
major investment and costly maintenance, it usually indicates that they are self-employed
individuals, because they may incur losses when replacing or repairing their equipment.

3. Chance of profit/risk of loss - The degree of financial risk taken by the worker, the worker's
opportunity for profit (or risk of loss) in the performance of his or her tasks

In this case, whether youre involved in an employer-employee relationship or a business

relationship depends on your financial involvement. Do you have a chance of making a profit? Do
you run the risk of incurring losses due to bad debts, damage to equipment or materials, or delays?
Do you cover the operating costs? If these three things are true, youre a contractor, not an
employee.

Suite 210 - 1080 Mainland Street, Vancouver, BC V6B 2T4

P. 604.270.2703 | F. 604.435.5329 | C. 604.889.5329
ashwin@mhrj.com | www.mhrj.com * Incorporated professional
 4. Integration

This appears to be a further attempt to divine the intention of the parties involved. The Canada
Revenue Agency states, Where the worker integrates the payer's activities to his own commercial
activities, a business relationship probably exists... Where the worker integrates his activities to the
commercial activities of the payer, an employer-employee relationship probably exists. Exactly
how one would determine such integration is not laid out. The Employee or Self-Employed? guide
from Canada Revenue Agency seems to treat this point as a summary category calling for a review of
the other three.

It would seem that one obvious way of proving integration to your own commercial activities
would be to have multiple clients. The contractor who only has one client makes it too easy for
others to perceive his relationship with that client as an employer-employee one.

Strategies to Minimize PSB Risk

Control

In identifying ways to get around the PSB rules, the first thing you must do is exercise control. So, add in
your contract that you are to work independently without direct or indirect supervision.

Tools and Equipment

In the contract, stipulate that you will be bringing the tools and equipment required to perform your
job. Tools and equipment include software and computers that you would use. Practically, this may be
difficult to do because most large companies require that their own software and equipment be used
because of IT security reasons.

If that is the case, you can bring your computer and software to do support functions related to your job
like documenting tasks in a word editor or organizing figures in a spreadsheet. Also keep a computer, a
scanner, a printer, a fax, and so forth, in your home office.

Subcontracting Work

Put in the contract that you are allowed to hire sub-contractors to help you complete your job. Some
customers and employers will absolutely not allow this. If that is the case you should hire an employee
to help you with support functions like record keeping, bookkeeping, organizing data, and other small
tasks.
Financial Risk

You must demonstrate that you are taking a financial risk in order to avoid being treated as a PSB. In
your contract, put in a clause that says you are responsible for incurring any expenses required to
deliver your services. These can include expenses like your car, home office, internet, cell phone, and so
forth.

Opportunity for Profit

You should demonstrate that there is the ability to earn profit over and above your fixed hourly wage.
Consider putting a clause that says that you are entitled to a bonus if certain milestones or goals are
achieved.

Financial Dependence

You must demonstrate that you have more than one customer. So, consider taking on other smaller
contracts simultaneously so that you have more than one customer.

More Tips:

Here are some other practical tips that you should undertake:

Maintain a company website.

State your intention in the contract. This is not an employer employee relationship but is one of
an independent contractor and a customer. The courts often look to the intention of an
agreement to determine its substance.

Advertise your business in online directories and consider printing brochures.

Have a separate business telephone line for your business.

Get business cards printed and distribute them.

Do not act like an employee or attend employee functions, unless you have been paid to attend

Have professional advisors help you set up your company, do your books and records, and file
your taxes.

Get appropriate insurance to cover the services you provide.