A PSB? • CONSIDER THAT COMPANY “B” HAS EMPLOYEES WHO ARE INPLACE ALONGSIDE OF EMPLOYEES OF COMPANY “A”. ONE NEEDS JUDGE WHETHER THESE EMPLOYEES ARE, FACTUALLY, EMPLOYEES OF “A” COMPANY, IF SO, THEN “B” IS A PSB.
COMPANY B SHOULD CAREFULLY GUAGE THE DETAILS OF THE ARRANGEMENT USING PUBLISHED LITERATURE, SINCE ITS OWN CORPORATE INCOME TAX RATE DEPENDS ON THE RESULT. ONE NEEDS WEIGH THE AGGREGATE FACTS AND CAREFULLY CONSIDER THE BODY OF VARIOUS LEGAL VIEWS AND FACTUAL TESTS, AND, IF NECESSARY, STUDY CASE LAW. CRA MAY NOT AGREE WITH YOUR DETERMINATION, SHOULD IT AUDIT.
There are various tests implied as sufficient to decide whether the entity B has been interposed in what would normally be an employer-employee relationship, this being done for the purpose of saving income tax. Typically the owner of entity B has made an agreement to work for entity A, however, A, and B, mutually agree that B would be interposed.
Frequently, A appoints C, a third party hiring agency, as middleman, to protect A, and manage the dealings with B, including remuneration. Many industries have companies within it which function within these parameters.
CRA, in its audits of companies, considers the PSB issue. Many of these companies, may fit either type A or B, above! It will then re-assesses companies whom it judges are PSB’s. A re-assessment will normally result in extra income tax to both B, and B’s shareholder. The additional income tax from the 17% additional tax rate due from a PSB, and the result of denial of many expenses permitted by a SBC (Small Business Corporation). The final incursion of CRA is to assess both Interest and Penalties on late taxes, both corporate and personal.
Tests for a possible a PSB situation (see below) are intended to assist in concluding the certainty of a possible PSB situation existence for (B). In the aggregate, if effective control of the employees of (B) rests with (A) company, B is a PSB.
Tools of work provided by whom? Degree of independence in hours of work? Employee benefits, or lack thereof? Existence of substantial service by B to third-party companies? Risk of Loss? Use of an intermediary C?
CASE LAW IS WIEBE DOOR SERVICES
If B is PSB, small business deduction of approximately 15% not available, instead tax rate of 32%.
The owner of B needs consider, the corporate intention and schedule dialogue with your CPA, both carefully, and frequently. Lay the facts on the table. The CPA should address the Company’s PSB risk in the annual Engagement Letter.
It is possible to mitigate the Risk, by planning healthy amounts of T4 income and following the bonus rules.