Are You Running a Personal Services Business Without Knowing It?

Xponents CPA
Sep 6
3 min read

What’s a PSB, and Why Should You Care?

Hey, freelancers and small business owners, we need to talk. If you’re running a one-person corporation and providing services to clients, you might unknowingly fall into a tax trap called a Personal Services Business (PSB).

It sounds fancy, but being classified as a PSB is the tax equivalent of getting a surprise bill after a fun night out—it’s not what you want. Higher taxes, fewer deductions, and a whole lot of “What just happened?”

So let’s decode this mystery, figure out if you’re safe, and—if you’re not—learn how to dodge this tax headache.

The PSB Lowdown: Are You in the Danger Zone?

Here’s the deal: A PSB is when your corporation looks a little too much like an employee in disguise. The CRA (Canada Revenue Agency) loves finding these cases, because PSBs don’t get the same tax breaks as regular corporations.

How Do You Know If You’re a PSB?

Ask yourself:

Do I work mostly for one client?
Does my client call the shots—like where, when, and how I do my work?
Am I using their equipment instead of my own?
Do I get paid like clockwork, no matter how well things are going?

If you’re nodding along to these questions, the CRA might see you as a PSB. And trust me, you don’t want to be on their radar.

Why PSB Status is a Bad Deal

Higher Taxes PSBs are taxed at a federal rate of 33% (plus provincial rates), instead of the lower small business rate of 9%. That’s a huge leap.
Say Goodbye to Deductions Regular corporations can write off all sorts of things: office space, laptops, advertising costs, and more. PSBs? Not so much. You’re limited to basic expenses like salaries and a handful of other costs.
The CRA’s Side-Eye If the CRA reclassifies you as a PSB, they’ll reassess your past returns, which could mean back taxes, penalties, and a lot of stress-eating.

How to Stay Out of PSB Trouble

Don’t Put All Your Eggs in One Basket: Work for multiple clients. If you rely on a single gig, the CRA might think you’re more like an employee than an independent business.
Own Your Business—Literally: Use your own tools, set your schedule, and avoid having clients micro-manage you. Independence is key.
Take Some Risks: Hire people, invest in equipment, or expand your client base to show you’re truly running a business.
Put It in Writing: Draft contracts that clearly outline independence: your responsibilities, payment terms, and control over how you work.

Case Study: When Sarah Got a PSB Wake-Up Call

Sarah’s a tech consultant who worked exclusively for one big client. She used their software, followed their schedule, and even had a desk at their office.

What Happened? The CRA flagged Sarah’s corporation as a PSB. Why?

She worked for just one client.
She didn’t control her work environment.
Her income looked more like a salary than a business payment.

The Fallout:

Tax rate jumped to 33%.
Lost deductions for home office and travel expenses.
Paid thousands more in taxes.

What Could She Have Done Differently?

Found more clients.
Worked remotely with her own tools.
Strengthened contracts to emphasize independence.

FAQs About PSBs (or “Should I Worry?”)

Q1: Does Incorporating Protect Me? Not necessarily. Incorporation helps, but if your work arrangement looks like an employee relationship, the CRA can still classify you as a PSB.

Q2: Can I Fix It If I’m Already a PSB? Yes! Diversify your client base, formalize contracts, and adjust how you operate. The sooner you act, the better.

Q3: What If I Have One Big Client and a Few Small Ones? The CRA looks at the overall picture. If one client dominates your income, it may still raise red flags.

Final Thoughts: Keep Your Business Safe and Independent

Being labeled a PSB isn’t the end of the world, but it’s definitely not where you want to be. By spreading out your client base, drafting strong contracts, and showing independence, you can protect yourself—and keep the CRA happy.

After all, you started a business to be your own boss, right? So make sure your setup reflects that.

Need Help With PSB Risk? Contact Xponents CPA

At Xponents CPA, we help business owners, contractors, and incorporated professionals structure their corporations properly, minimize tax risk, and stay compliant with CRA rules. If you’re worried about PSB classification—or just want to make sure your setup is bulletproof—our team can guide you.

Book a consultation with Xponents CPA today and take control of your tax strategy before the CRA does it for you.