On October 31, 2011, the Department of Finance proposed changes
to the Income Tax Act that effectively put an end to the
potentially advantageous tax planning strategy of having an
employee agree to provide their services to their employer through
a corporate entity (a "Personal Services Business"). The
proposed legislation creates a potential significant tax cost to
taxpayers who are currently in this structure.
Up until these proposed changes were announced, Personal
Services Businesses that earned service fees which would otherwise
have been paid to an individual employee were subject to a 25%
corporate tax rate. Compare this with the top marginal rate for
individual taxpayers (in BC 43.7%), and one can see the tax
deferral opportunity this structure created. In addition to a tax
deferral, there was the opportunity for a taxpayer to use the
Personal Services Business as a mechanism to income split with low
income family members.
The Department of Finance effectively eliminated this tax
planning opportunity by increasing the corporate income tax rate on
income earned by a Personal Services Business to 38%. This
corporate tax rate combined with the personal income taxes payable
on the dividend paid by the Personal Services Business to the
individual shareholders results in a combined corporate and
personal income tax rate of up to 52% in British Columbia. This 52%
rate is much higher than would have been the case if the individual
services provider had earned the income personally as an employee
(as noted above, 43.7% in British Columbia).
Given the proposed changes, employees who provide their services
through a Personal Services Business should consider restructuring
their affairs. These rules are proposed to be effective for
taxation years beginning after October 31, 2011.
Independent contractors providing their services through a
corporation are not subject to these rules. The distinction between
an independent contractor and an employee is not always clear and
it is important that such service providers ensure that they could
not be found to be providing services in a manner similar to an
employment relationship (so they are not found to be a Personal
There are some continuing exceptions to the Personal Services
Business rules for incorporated employees, as well as other
possible strategies to avoid the application of these punitive
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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