Incorporated Employee - What is that?

ContactA trend these days is for companies to ask their employees to incorporated themselves. Why? Because the company is no longer required to remit any source deductions on your behalf (think CPP and EI), they do not need to provide you with a benefits package, no overtime payout, vacation pay and there is less red tape to let their employees go.

The incorporation process is relatively easy and quick and it can seem attractive to become an incorporated employee (also known as a Personal Services Business), however, the tax implications of a PSB are different than other types of corporations.

1. Tax Rate: PSBs cannot claim the small business deduction and are taxed at the full rate. In fact, a PSB is taxed an additional 5% at the federal level. PSBs are taxed at a 33% federal rate as compared to small business corporations that enjoy a low federal tax rate of 9%.
2. Limited Tax Deductions:
   1. Salaries and wages paid to the incorporated employee (including CPP, EI, Pension Plan Costs and other benefits).  
   2. Allowances paid to the incorporated employee.
   3. Expenses for which the incorporated employee would have been allowed to deduct as employment expenses.
   4. Legal expenses to collect the amounts due against the services provided.

In order to be a PSB, one must pass two important tests:

1. Specified shareholder: the incorporated employee must be a specified shareholder of the corporation. In plain language, the shareholder must be non-arms length such as yourself or your spouse.
2. Pass the test of employee / independent contractor. If by definition, you are deemed to be an independent contractor, you are not a PSB.

If you are offered to become an incorporated employee (or if you are not sure), please talk to us for some guidance. We are happy to help!