Change in the Taxation of Personal Services Businesses
John Wright CA, CMC discusses an upcoming change in the taxation of personal services businesses.
John Wright, CA, CMC
Draft legislation was released at the end of October that, if passed, would result in major changes in how personal services businesses are taxed. The tax rate on income earned in these companies would increase by 13% for fiscal years beginning after 2011.
The shareholders of personal service businesses are sometimes described as "incorporated employees". If they were not incorporated the shareholder would usually be considered an employee of another organization. Usually the personal services business has a long-term contract with one organization.
Personal services businesses are already ineligible for the small business deduction. The draft legislation will also deny them the general rate reduction. On top of that these businesses will continue to be limited in terms of what types of expenses are deductible for tax purposes. They are restricted to those an employee would normally be allowed to deduct.
As a result of the proposed changes personal services businesses will generally not be effective from a tax deferral or income splitting perspective after 2011. But contractors are required to be incorporated in order to work with some organizations. Care should be taken to include clauses that are beneficial to the contractor from a taxation point of view.
For all of these reasons we recommend that taxpayers who are earning income through incorporated personal services businesses consult with their tax advisors.