Your employer says the work continues only if you bill through your own corporation. Before you file the paperwork, you need to know about the personal services business rules. They can push your corporate tax rate to 44.5% and erase almost every deduction you were counting on.
Key takeaways
- A personal services business is the CRA’s name for a corporation that is really an employee in disguise. One full-time client, their equipment and their schedule is the classic pattern.
- A PSB pays a combined Ontario corporate rate of 44.5%, loses the small business deduction, and can deduct little beyond the salary it pays you.
- Splitting income with an inactive spouse does not work for a one-client consultant. The TOSI rules tax those dividends at the top rate.
- Incorporating still pays when you run a genuine independent business: more than one client, your own tools, real risk, and profit you can leave inside the company.
Why employers push engineers and consultants to incorporate.
This is happening across Durham Region and the GTA, especially to engineers, IT specialists and senior contractors. A large Ontario employer ends your salaried role, then offers the same work at a higher hourly rate if you invoice through a corporation.
For the employer, the savings are obvious. No CPP employer contributions. No EI. No vacation pay, no benefits, no severance. They move all of that onto you and call you a contractor.
The higher rate can look great. The problem is what the CRA sees when it looks at the arrangement.
What a personal services business actually is.
A personal services business, or PSB, (you may also see it written as a personal service business) is the CRA’s name for a corporation that is really just an employee in disguise. The PSB rule sits in the Income Tax Act, and the test is simple to state.
If you would reasonably be regarded as an employee of the client were it not for your corporation, the CRA can treat your company as a PSB. You are then the incorporated employee, and the client is your employer in all but name. The PSB rules apply when you are a specified shareholder, meaning you own at least 10% of the corporation, which covers nearly every owner-operator.
The CRA weighs the same factors a court uses to tell an employee from an independent contractor:
- Control. Does the client set your hours, your location and how you do the work?
- Tools.Do you use the client’s laptop, email and office, or your own?
- Risk. Can you make a profit or take a loss, or do you just get paid for hours?
- Integration.Are you embedded in the client’s team like staff, or running your own business?
These are the same factors the Tax Court of Canada weighs when it applies the PSB rules to a private corporation. No single factor decides it. The CRA looks at the whole relationship.
One full-time client, the client’s equipment, a desk in their office and a 40 hour week is the classic personal services business fact pattern. The CRA has run a dedicated PSB compliance review program since 2022, and these arrangements are exactly what it looks for. See the CRA’s overview of the tax implications of a personal services business.
The 44.5% trap.
A normal Canadian-controlled private corporation pays a combined Ontario small business rate of 12.2% on active business income up to the $500,000 small business deduction limit. That low rate is the main reason people incorporate in the first place.
A PSB gets none of that. It is denied the small business deduction and the general rate reduction, and it pays an extra 5% federal tax on top. The result in Ontario is a combined corporate tax rate of 44.5%. This higher PSB rate exists to strip out the advantage of turning employment income into corporate income.
Here is the same $50,000 left inside the company under three different statuses.
| Your status | Corporate tax on $50,000 retained | What you can deduct |
|---|---|---|
| Employee (T4) | Not applicable, taxed in your hands | Employment deductions only |
| Genuine incorporated contractor (CCPC) | $6,100 at 12.2% | Normal business expenses |
| Personal services business | $22,250 at 44.5% | Basically only your salary |
That is a $16,150 difference on a single $50,000, before you have paid yourself a cent. And it gets worse, because of what you can no longer write off.
The deductions you lose.
A normal consulting corporation deducts the cost of doing business: home office, vehicle, equipment, software, professional development, a portion of meals. A personal services business cannot. Under the Income Tax Act, a PSB can only deduct the salary and benefits it pays to you as the incorporated employee, plus a short list of employee-type costs such as certain legal fees to collect amounts owing.
Your home office, your laptop, your car and your training all stop being deductible. So a PSB pays the highest corporate tax rate and loses the write-offs at the same time. Those lost expense deductions are often worth more than the headline rate. For a deeper look at what a healthy corporation can claim, see our guide to corporate tax.
Share structure and income splitting, where the plan usually breaks.
The other reason people incorporate is to split income with a spouse or adult child by issuing them shares and paying dividends. For a one-client consultant, this rarely works.
The tax on split income rules, known as TOSI, tax dividends paid to a family member who is not genuinely active in the business at the top marginal rate. There is an “excluded shares” exemption that can switch TOSI off, but it requires that less than 90% of the corporation’s income come from services. A consulting corporation earns close to 100% of its income from services, so it fails that test by design.
There are other exits from TOSI, such as a family member who works an average of 20 hours a week in the business, or a reasonable return for capital they actually contributed. A spouse who does not really work in your consulting practice meets none of them. The CRA explains the excluded shares rules in detail.
The takeaway: setting up a 50/50 share split with an inactive spouse does not lower your family’s tax. It just creates dividends the CRA taxes at the top rate.
Salary vs dividends when you are a PSB.
For most incorporated owners, the salary vs dividends choice is a real planning decision. For a PSB it mostly is not. Every dividend comes out of after-tax corporate money, is not deductible to the corporation and can be caught by TOSI, so it is taxed again as personal tax in your hands. Paying yourself a salary is almost always the right move.
| Question | Salary | Dividends |
|---|---|---|
| Deductible to the corporation | Yes, one of the few PSB deductions | No |
| Triggers TOSI for an inactive spouse | No | Often, at the top rate |
| Builds RRSP room and CPP | Yes | No |
| Usually right for a PSB | Yes | Rarely |
Paying yourself a full salary pulls income out of the 44.5% corporation and onto your personal T1, where you are taxed at regular rates and build RRSP room. You still pay CPP on that salary, and through the corporation you cover both the employee and employer halves. As a controlling shareholder you are generally exempt from EI, so you also lose access to EI benefits. The 2026 CPP maximum pensionable earnings sit at $74,600 at a 5.95% rate. You can confirm the figures on the CRA’s CPP contribution rates page.
When incorporating as a contractor actually makes sense.
None of this means incorporating is a bad idea. It means incorporating into a single-client, employee-style arrangement is a bad idea. Incorporation pays off when you are running a genuine independent business.
Lean towards incorporating when most of these are true:
- You have, or are building, more than one client
- You control your own hours, methods and location
- You supply your own tools and workspace
- You carry real business risk and can hire help
- You earn more than you need to live on, so retained earnings can stay in the company and grow
Stay an employee or a sole proprietor when the work is one client, on their equipment, on their schedule, looking exactly like the job you already had. If you want a second opinion before you decide, our advisory team runs the numbers with you. You can also review the practical side of setting up a company in our guide to incorporating in Ontario.
Talk to us before you sign anything.
If an employer has asked you to incorporate, talk to us before you sign anything. We help engineers, consultants and contractors across Oshawa, Whitby, Ajax, Pickering, Clarington, Bowmanville and Uxbridge figure out whether incorporating saves money or walks them into the personal services business trap. Book a free 15-minute call and we will run your numbers first.
This article is for general information only and does not replace professional tax advice. Tax rules change, and your specific situation matters. Always confirm with a qualified CPA before making tax decisions.
