A recent Globe & Mail article tackled the issue of personal services businesses (PSB) and how many – especially in the trucking industry – operate incorrectly in accordance to rules in our tax laws.
The article, special to the G&M, highlighted how CRA has completed Phase 1 of its pilot project on PSBs and found that about three-quarters of PSBs work in three industries: (1) transportation and warehousing, (35 per cent, with 95 per cent of these in general or specialized freight trucking); professional, scientific and technical services (26 per cent); and construction (13 per cent).
Furthermore, almost two-thirds (64 per cent) of PSBs are incorrectly claiming the small business deduction, which they are not eligible to claim, the article pointed out. The CRA found that this error results in having to repay the CRA an average of $16,711 in corporate taxes.
The incorrect application of PSBs in trucking is at the heart of the widespread Driver Inc issue, a misclassification scheme which allows employers to mask employees as contractors so that they avoid paying any payroll tax and federally regulated entitlements and benefits to workers. In turn, the workers wrongfully told they have several tax benefits by incorporating as a PSB, but in nearly all cases, they will pay a higher tax than the effective tax rate payable by a driver on employment income. In addition, you are also not eligible for many business deductions available to true independent contractors. Finally, it comes with many added business, legal and tax expenses a normal employee would not have, like special corporate tax filings.
Click here for the full Globe & Mail article which outlines the proper rules and definition of a PSB – such as you need to have control over when and where you work, that you’re not providing services to just one company, that you provide your own tools to perform your services and that you’re taking on some economic risk (a chance for a profit or a loss) – and tips how to avoid being classified as a PSB when the conditions don’t apply.