Personal services business risk for incorporated contractors
This guide explains the personal services business rules: the Canada Revenue Agency incorporated employee test, the two exceptions, and the 44.5 percent Ontario tax rate that follows if your corporation fails the test. We prepare and file your articles of incorporation for $35.00, HST included. The government fee is separate and charged at cost: $200.00 to Corporations Canada, or $300.00 to the Ontario Business Registry. Open Corporation for $35 is a department of Gondaliya CPA.
What a personal services business is
A personal services business is a corporation that provides services which, without the corporation in between, would be seen as the work of an employee of the client. The Canada Revenue Agency calls the person doing the work an incorporated employee.
The rule is in subsection 125(7) of the Income Tax Act. It applies when the incorporated employee, or a person related to them, is a specified shareholder of the corporation. That generally means owning at least 10 percent of the shares of any class.
The rule exists because a corporation cuts tax on business income. Without it, an employee could set up a corporation, have the employer pay it instead of paying wages, and pay a lower rate on the same job.
Being a personal services business is not illegal and it does not close the corporation. It changes how the corporation’s income is taxed, and the change is expensive.
| Term | What it means in plain words |
|---|---|
| Incorporated employee | The person who does the work through their own corporation |
| Specified shareholder | Someone who owns at least 10 percent of the shares of any class, alone or with related persons |
| Personal services business | A corporation whose work would be employment if the corporation were not there |
Contractors in technology, consulting, trucking and construction meet this question most often. Our IT consultant page covers the setup for that group.
The incorporated employee test
The test asks one question: if the corporation were removed, would the worker be an employee of the client or a person in business on their own account? The courts answer it by looking at the whole relationship, not at one fact.
The leading case is the Supreme Court of Canada decision in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. (2001). It approved the factors set out by the Federal Court of Appeal in Wiebe Door Services Ltd. and said no single factor decides the answer.
The Canada Revenue Agency applies the same approach in its guide RC4110, Employee or Self-Employed. It first asks what the two sides intended, and then whether the working conditions actually match that intention.
| Factor | Points toward employment | Points toward a business of your own |
|---|---|---|
| Control | The client sets your hours, supervises your work and decides how it is done | You decide how, when and where the work is done |
| Tools and equipment | The client supplies the laptop, the office and the software | You supply and pay for your own equipment |
| Helpers | You must do the work personally | You can hire helpers or send a substitute |
| Financial risk | You are paid for your time whatever happens | You carry costs and can lose money on a job |
| Investment and management | You have no investment in the work | You have invested in the business and manage it |
| Chance of profit | Your income is fixed by the hours you work | You can earn more by working efficiently or taking more clients |
A contract that calls you an independent contractor helps, but only if the day-to-day facts agree with it. A contract that says one thing while the work looks like a job is weighed against the facts.
We incorporate contractors for $35.00, HST included
Government fee shown separately at cost. A CPA reviews your contract before you incorporate.
The two exceptions
Even when the work looks like employment, the rule does not apply in two situations written into the definition.
More than five full-time employees
The corporation is not a personal services business if it employs more than five full-time employees throughout the year. Six is the minimum, and they must be full-time for the whole year.
The Tax Court of Canada has refused this exception to a corporation with five full-time staff plus part-time help. Part-time staff did not bring it over the line.
Services to an associated corporation
The rule also does not apply when the amount paid for the services is received from a corporation that was associated with it in the year. A management company billing its own operating company is the usual example.
| Exception | What has to be true |
|---|---|
| More than five full-time employees | At least six full-time employees, throughout the whole year |
| Associated corporation | The client paying for the services is a corporation associated with yours in the year |
Association is explained in our small business deduction guide.
The tax rate that follows
Income of a personal services business loses the two reductions that make a corporation worthwhile. It gets no small business deduction and no general rate reduction, and an additional 5 percent federal tax applies on top.
The federal rate on that income is 33 percent. That is the 28 percent rate left after the provincial abatement, plus the 5 percent additional tax added from 2016. Ontario then applies its general rate of 11.5 percent, for a combined 44.5 percent.
| Type of corporate income in Ontario | Federal | Ontario | Combined |
|---|---|---|---|
| Active business income within the $500,000 small business limit, from July 1, 2026 | 9 percent | 2.2 percent | 11.2 percent |
| Active business income above the limit | 15 percent | 11.5 percent | 26.5 percent |
| Personal services business income | 33 percent | 11.5 percent | 44.5 percent |
Ontario cut its small business rate from 3.2 percent to 2.2 percent from July 1, 2026, and the cut is prorated for a tax year that straddles that date.
The rate is not the only cost. A personal services business can deduct only a short list of expenses: salary, wages and benefits paid to the incorporated employee, certain costs of selling property or negotiating contracts, and legal costs to collect fees owed for its services. Most other business costs are denied.
Then the money is taxed again when it is paid to you as a dividend. The top 2026 Ontario personal rate on non-eligible dividends is 47.74 percent, so income that went through a personal services business and out as a dividend can lose most of its value to tax.
Tax rates change with federal and Ontario budgets. These tax figures were last checked on 15 October 2026.
Who the Canada Revenue Agency is looking at
The Canada Revenue Agency has run a pilot project on personal services businesses. It first looked at the businesses paying potential personal services businesses, and then at the corporations themselves for the 2022 tax year.
About 74 percent of the potential personal services businesses it found were in three industries: transportation and warehousing at 35 percent, professional, scientific and technical services at 26 percent, and construction at 13 percent.
About 64 percent of those reviewed were claiming the small business deduction when they should not have. The average reassessment was $16,711.
In March 2025 the Canada Revenue Agency and the federal Labour Program signed an agreement to share information about trucking, where drivers paid through their own corporations are a known pattern.
| Industry in the pilot | Share of potential personal services businesses |
|---|---|
| Transportation and warehousing | 35 percent |
| Professional, scientific and technical services | 26 percent |
| Construction | 13 percent |
A reassessment can reach back several years at once, with interest on each year. The cost of getting this wrong grows the longer the arrangement runs.
How contractors lower the risk
No step removes the risk on its own. The answer turns on the whole relationship, so the aim is to make the facts look like a business because they are one.
Run it as a business
Work for more than one client where you can. Use your own equipment, set your own hours where the work allows, and keep the right to send a substitute or hire help.
Write the contract to match reality
A written contract that sets out deliverables, your control over how the work is done and your responsibility for your own costs is evidence of intention. It has to match what actually happens.
Pay yourself a salary where the risk is real
Salary paid to the incorporated employee stays deductible even for a personal services business. Income paid out as salary is taxed in your hands at personal rates rather than sitting in the corporation at 44.5 percent.
| Step | Why it helps |
|---|---|
| More than one client | Shows you are in business, not tied to one employer |
| Your own equipment and costs | Shows investment and financial risk |
| Right to substitute or hire | Shows the work is not personal service to one employer |
| Contract matching the facts | Supports the intention test in RC4110 |
| Salary to the owner | Reduces the income left exposed to the higher rate |
Our pricing page lists our fees for incorporation and the filings that follow.
What incorporating costs
A contractor who passes the test needs a corporation like any other business, and our fee to form one is fixed. Government fees are charged at cost.
| Item | Amount | HST | Total | Who charges it |
|---|---|---|---|---|
| Our incorporation filing fee | $35.00 | Included | $35.00 | Open Corporation for $35 |
| Federal articles of incorporation | $200.00 | Not applicable | $200.00 | Corporations Canada |
| Ontario articles of incorporation | $300.00 | Not applicable | $300.00 | Ontario Business Registry |
Our $35.00 fee includes HST and government fees are passed through at cost with no mark-up. Every figure is on our full pricing page. Open Corporation for $35 is a department of Gondaliya CPA.
What a CPA checks before a contractor incorporates
This guide explains the rules. It cannot tell you whether your contract passes the test, because the answer depends on how the work is actually done.
We start with the contract. We read the terms on control, hours, equipment, substitution and payment, and compare them with how the work happens day to day.
Then the client list. One client for several years is the pattern the Canada Revenue Agency looks at most closely, so we look at how many clients you have and whether that can change.
Then the pay plan. Where the risk is real, salary paid out to you reduces the income left in the corporation that could be taxed at the higher rate. Our salary against dividends guide sets out how each is taxed.
Last, the return. The parent firm prepares the corporation’s T2 return through its corporate tax return filing service, with the small business deduction claimed only where the income qualifies. Open Corporation for $35 is a department of Gondaliya CPA.
Case studies
Three contractors who asked us about the personal services business rules, and what we did.
One client for three years
The situation: An IT consultant had billed a single bank through a corporation for three years. They worked on the bank’s site, on the bank’s equipment and to the bank’s hours.
What we did: We compared the contract with the Canada Revenue Agency factors and explained the exposure. We then reset the pay plan so most of the income came out as salary.
The result:
- Risk explained before any review
- Salary deductible to the corporation
- Little income left exposed to the higher rate
Before signing the first contract
The situation: A project manager was offered a twelve-month contract and asked whether to incorporate before signing.
What we did: We read the draft contract and showed which terms looked like employment. The client agreed to changes that matched how the work would really be done.
The result:
- Contract reflects an independent business
- Corporation formed for $35.00 plus the government fee
- Records kept to support the position
Hiring staff
The situation: A small engineering consultancy had grown from the owner alone to several people working for it.
What we did: We checked the payroll records against the exception for more than five full-time employees throughout the year, and set up payroll properly.
The result:
- Exception tested on the records
- Payroll registered and running
- Small business deduction claimed with support
Book a free consultation call
Not sure whether your contract passes the incorporated employee test? Bring it to a free call. Pick a time below and a Chartered Professional Accountant will call you.
Frequently asked questions
These are the questions contractors ask about the personal services business rules. Each answer can be read on its own.
What is a personal services business?
What tax rate applies to a personal services business in Ontario?
What is the incorporated employee test?
What are the exceptions?
Which expenses can a personal services business deduct?
Does having one client make my corporation a personal services business?
Can paying myself a salary reduce the risk?
What does it cost to incorporate?
The CPAs who review this guide
A Chartered Professional Accountant reviews your structure before anything is filed. Open Corporation for $35 is a department of Gondaliya CPA.
What our clients say
Gondaliya CPA Professional Corporation is registered with CPA Ontario under firm registration number 61330051. Our clients have left us 1,300+ five-star Google reviews, and we work from 13 Ontario offices, open 9:00 AM to 8:30 PM, Monday to Sunday. We back every filing with a 30-day money-back guarantee and a 60-day fee-matching policy, and we are a Xero Partner Award Winner 2026. Open Corporation for $35 is a department of Gondaliya CPA.
These Google reviews belong to Gondaliya CPA Professional Corporation and cover every service the firm provides.
Incorporate with the risk checked first
Send the intake form and we will look at your contract, your clients and your pay plan before anything is filed. Our fee is $35.00, HST included, and the government fee is shown separately at cost. Payment is by Interac e-Transfer to info@gondaliyacpa.ca, and the security question is Not Applicable because auto-deposit is enabled.
No legal advice
Gondaliya CPA Professional Corporation is a firm of Chartered Professional Accountants licensed by CPA Ontario, firm registration number 61330051. It is not a law firm. We prepare and file corporate documents and we provide accounting and tax advice. Nothing on this page is legal advice, and reading it creates no solicitor and client relationship. For legal advice on an employment or service contract, consult a lawyer licensed in the province where you work.
Open Corporation for $35 is a department of Gondaliya CPA.
