To Incorporate or Not
While setting up a corporation may seem like a good idea if you’re self-employed, it can have serious tax consequences in certain instances. If Canada Revenue Agency determines that you are, effectively, an “incorporated employee”, it may disallow a number of business expenses as well as the small business deduction which normally applies to the first $500,000 of active business income that a corporation generates. This can result in the corporation’s income being taxed at the highest corporate rate.
Some of the criteria that distinguish a corporation set up by a truly independent contractor versus a personal service corporation (PSC) include whether the corporation has only a single client or very few clients, whether the client provides work space or equipment and how much control the client has over when and where the contractor provides his or her services. Canada Revenue Agency’s interpretation of the Income Tax Act with regards to “incorporated employees” is that, without the existence of the corporation, the person performing the services on behalf of the client company would reasonably be regarded as an officer or employee of that company.
Those who are required to work on-site for their client, on a schedule determined by the client and who are provided with work space and equipment would most definitely be considered to be operating a personal service business by CRA.