A personal services business is a type of business that is classified as personal service income and is also the type of tax classification as listed by the Canadian Revenue Agency. In this type of business, there is no commodity or physical product being traded. Instead, the business purely relies on professional services being given to clients that require their particular expertise on certain matters. People classified as such are lawyers, doctors, accountants, contractors, and other professional business service like coaching, training, and consultation also falls under personal services business.
Since there are many types of work classification that fall under this, the revenue service has classified individuals who profit from skills, knowledge, and personal effort as a personal-type of business. Since there are different legislation involved on the taxing of personal services business, the changes in legislation snowball down to the individuals whose tax-classification falls under this type.
Personal services business CRA classifies personal services businesses as types of income that is non-active which is why it poses unique certain tax issues that cannot completely be gathered up. Working as a professional with this type of tax classification necessitates the consulting of your tax liabilities with accountants so that you only pay tax that you duly owe and not get overcharged on stated theoretical or statistical matters derived from different professionals of the same specialization. Getting your tax status properly evaluated by an accountant will benefit your greatly.
When you incorporate your business, the last thing you will really ever want is for the CRA to classify your business as personal services business. If this happens, the individual who has to pay the price for this designation faces very steep costs. Since this designation or label can change on a yearly basis, being a proper corporation on one and then as personal business services on another, and then going back to being a proper corporation again, the overall taxation that you get can be quite confusing. This is why it pays to consulting a tax advisor or an accountant before doing any incorporating in your business.
The main disadvantage in getting classified by the CRA as personal services business is that employees are not able to make claim over the same expenses as what can be done by small businesses. Additionally, eligibility to small business deduction is non-existent when your work classification is personal services business. This creates a significant tax rate difference all with just being under a different classification, not to mention the strict penalties slammed should re-evaluation of your filed income tax take place.