- Personal Services Business Corporations Under Attack (Personal Services)

Personal Services Business Corporations Under Attack

Subject: Personal Services
Number: 11-27
Date: 11/4/2011

technical amendments will eliminate any current deferral opportunities with PSB's

On October 31, 2011, the Department of Finance released a package of income tax and sales and excise tax technical amendments. Included in the package was a significant change for personal services business corporations ("PSB"). We previously discussed PSB's in Tax Tips 08-08 and Tax Tips 10-11. Tax Tip 10-11 explained how the eligible dividend regime and declining corporate tax rates had the potential to make PSB status advantageous instead of punitive. Prior to the introduction of the eligible dividend regime in 2006 and recent declining corporate tax rates, it was costly to have PSB status since such a PSB was automatically taxed at the highest corporate tax rate and all expenses (with certain limited exceptions such as salaries to the shareholder) were not deductible. The later removal of the PSB's corporate surplus as a dividend would lead to double taxation. As was noted in Tax Tip 10-11, reduced corporate tax rates allowed for a significant tax deferral on income earned in a PSB and, in some provinces, the reduced tax rates on eligible dividends reduced or eliminated the double taxation when the earnings were distributed.

The proposed amendment introduced in the October 31, 2011 technical amendments will eliminate any current deferral opportunities with PSB's by causing any income earned by a PSB corporation to be taxed at a combined Federal- Provincial rate of 38% (as compared to the normal highest corporate rate for 2011 of 26.5%; 25% for 2012) assuming an average provincial tax rate of 10%. The proposed amendment applies to taxation years that begin after October 31, 2011. Accordingly, such an amendment will discourage taxpayers from using a PSB for income tax benefits in the future.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.