Are Incorporated Truck Drivers Considered Small Businesses in Canada?

Introduction

In Canada, there is a growing concern among incorporated truck drivers who file taxes as small businesses. The Canadian Revenue Agency (CRA) has taken a stance that may classify these drivers as Personal Services Businesses (PSBs). This article explores the implications of such classification and provides insights into the criteria used by the CRA to determine whether incorporated truck drivers can be considered small businesses.

Understanding Personal Services Businesses (PSBs)

A personal services corporation is essentially a one-person business that operates more like an employee rather than an independent contractor. When an incorporated business has only one client, the CRA has the authority to designate it as a personal services corporation.

Recently, the CRA has identified incorporated company truck drivers as Personal Services Businesses (PSBs). As a result, trucking companies that employ self-employed contractors are now required to issue T4As to these drivers. It\’s important to note that PSBs do not qualify for the Small Business Deduction and are subjected to the higher corporate tax rate. Some other professions that may be considered as PSBs include IT consultants, accountants, caterers, and construction workers.

Determining Factors for PSB Classification

The Income Tax Act outlines the rules for identifying PSBs. Generally, the following conditions need to be met:

1. Business income in the corporation comes from services provided by an individual on behalf of the corporation, often referred to as an \”incorporated employee.\”
2. The incorporated employee, or a related person, is a specified shareholder. This means that the individual, together with non-arm\’s length persons, owns 10% or more of the issued shares of any class of the corporation or any related corporation.
3. Without the existence of the corporation, the incorporated employee would typically be considered an officer or employee of the payor.
4. The corporation does not employ more than five full-time employees throughout the year.
5. The services provided by the corporation are not being supplied to an associated corporation.

Limited Deductions for PSBs

PSBs face limitations when it comes to deducting expenses. The Income Tax Act allows the following deductions for PSBs:

1. Wages, salary, and other compensation paid during the year to an incorporated employee of the corporation.
2. The cost of benefits or allowances provided to the incorporated employee.
3. The cost of selling property or negotiating contracts by the corporation, provided it would have been deductible if spent by the incorporated employee during their employment.
4. Legal costs incurred by the corporation in collecting amounts due for services rendered.

It\’s important to note that these deductions are only applicable to PSBs if they are also deductible for any other business.

Determining Factors for Personal Service Business Classification

The criteria for determining whether a corporation qualifies as a personal service business can vary. Some key factors that are often considered include:

1. Ownership of tools: Whether the corporation or the individual holds ownership of the tools necessary to perform the job.
2. Control over hours of work: The level of control the corporation has over determining the hours of work for the incorporated employee.
3. Risk-bearing: Which party assumes the risk associated with the work performed.
4. Subcontracting ability: Whether the incorporated employee has the ability to subcontract work to others.
5. Scope of work: The extent to which the incorporated employee is engaged in work for other clients.

Conclusion

For contract truck drivers predominantly serving a single company, it is crucial to familiarize themselves with the distinctions made by the Canada Revenue Agency between employees and independent contractors. By understanding the criteria used to classify entities as personal service businesses, drivers can take appropriate steps to safeguard their corporate status and explore opportunities to expand their business horizons.

Does this apply to you? Please contact us today to safeguard your corporate status.

https://www.canada.ca/en/revenue-agency/news/cra-multimedia-library/businesses-video-gallery/personal-services-business.html