If you are not quite sure what category your business fits into then you want to take a close look at what the CRA considers as a Personal Services Business or (PSB). As an incorporated business this is really important to you that you are not classified as this, because it would mean that you would lose the opportunity of the small business deduction. This is a significant loss because the small business deduction allows for a much smaller tax rate of a portion of your income for those who are incorporated in Ontario. Plus, you would lose your general rate deduction. Then added to this you will not have the same expense deduction advantage as a small business would.
In order for the CRA to determine if your business entity is a small business or a personal services business it looks at the activity that is being carried on and by whom. A PSB would be classed as such when the corporation provides services to another entity, that would normally be carried out by an officer or employer of that entity. In easier terms it means that instead of you being classed as a contractor you are basically an employee of the company.
Now while this may seem confusing for you it can become even more frustrating because the classification of personal services business can change each year. So for the last tax year the CRA deems that you are a personal service business, then this year because of some change in circumstances the business is now changed to a small business entity.
Throughout our posts and articles here at Toronto accountant we have pointed out many times why it is so important to rely on a proper tax expert to prepare your taxes for you. This PSB issue is just one more reason. Unless you really understand the business tax laws it is very easy to make a tax mistake that can be really costly especially when it comes to allowable deductions and business tax incentives. Your tax expert can help determine that your business is not at risk of being classed as a personal services business, and if it does fall into this category then the taxes must be prepared accordingly. He can also advise you as to what steps you would need to take to place the business back into the small business category.
Here at Toronto accountant we specialize in small to medium sized business accounting and taxes. We know how important it is to your business to be on the right financial track and be in good standing with your taxes and the CRA. Give Sam Seidman here at Toronto Accountant a call at 416-398-1700, and put your business taxes in his hands.
