Hello everybody. My name is Jon Sears and I am working with Sears Chartered Accountants. Today I am going to talk about the personal services business and why you may want to be one or why you may not want to be one.
Generally, in the past, people have never wanted to be considered as a personal services business. Personal services business is defined as an individual would be an employee if not for the incorporation. In layman terms, if somebody incorporated and then they charged out their fee that would otherwise be their employment income. They are considered an incorporated employee under the income tax act. This is a very bad thing because what happens is that you no longer get the small business rate which is 15.5% you go up to the corporate rate which is about 30 to 31% right now. So, generally we want not to be considered a personal services business.
Lately, after some tax research it makes sense for some people who would otherwise be considered a personal services business to incorporate anyways and admit that they are actually a personal services business. Why you may want to do that is income splitting opportunities and eligible dividends. What are eligible dividends? Eligible dividends are dividends that attract lower tax than regular dividends. At the top rate it is about 28% and then they go down from there. So sometimes and in some situations it makes sense for the incorporated employee to have a spouse, children, parents and be able to give them eligible dividends and income split that way. Otherwise, the only option they are left with is salary expense.
Very often as I have touched another topics, salary expense can be problematic because it has to be reasonable for the performance rendered. If it is not, CRA can deny the entire expense. Again with dividends, there are benefits through shareholding.
So for more information about personal services business and why it may make sense to be one, call a CA today.