Canada is cracking down on PSB! Beware of falling victim!

Have you established a limited company to provide long-term services to a single client, hoping to enjoy the low tax rates of a Canadian Private Company (CCPC)? You may have fallen into the "Personal Services Business" trap as defined by the Canada Revenue Agency (CRA). Once classified as such, your company's tax burden and deductible expenses will be severely restricted.

What is PSB? You may have already fallen victim to it.

Simply put, if you strip away the corporate shell and are essentially just an "employee" of that client, your company may be classified as a PSB (Private Branch).

The core conditions for CRA recognition (all four conditions must be met to trigger the recognition)

Eligibility requirements: The individual providing the service is a designated shareholder of the company (usually holding 10% or more of the company's shares).

Substantive Relationship: If this company did not exist, you should be reasonably regarded as an employee of the customer (payer).

Number of employees: The company has no more than 5 full-time employees throughout the year.

Related Exemption: The services are not provided to businesses affiliated with the company.

Many companies require individuals to establish a company as a condition of signing contracts, making the PSB phenomenon particularly prevalent in fields such as trucking, IT consulting, and engineering.

Serious consequences: High tax rates and limited deductions mean that once a company is identified as a PSB (Public Seller), the tax consequences far exceed those of ordinary companies.

💰High corporate tax rate

PSBs are not eligible for the small business tax rate (approximately 12.2% in Ontario) and must pay taxes at the highest federal and provincial rates. For example, in Ontario in 2026:

Comparison Item: Regular CCPC (enjoying small business tax rates) vs. PSB Corporation

Corporate tax rates in 2026 (Ontario, for example): Approximately 12.2% (Approximately 44.5%)

The difference — is more than 32 percentage points higher.

This means that, to earn the same CAD$100,000 in profit, an average company would earn approximately CAD$87,800 after tax, while a PSB company would earn only approximately CAD$55,500 after tax.

🚫Limited fee deductions

PSB companies can hardly deduct most regular business expenses, such as office supplies, travel expenses, meals, and advertising costs. Deductible items are extremely limited, basically only including:

The actual wages and benefits paid to the "employees" (i.e., yourself) of the PSB company.

Certain specific fees (such as outstanding attorney fees for collection services, etc.).

Key reminder: Unpaid bonuses or wages cannot be deducted.

Response strategies: How to avoid and manage risks

1️⃣ Assess risks and make payments cautiously.

If the service is more like that of an "employee": the most direct way is to have the company's revenue paid to you in full as salary. In this way, although the company makes no profit, it avoids the heavy tax of 44.5%, and you personally pay taxes on your salary, while the company can deduct this portion.

If you want to stay with the company: you should assess the risks in advance, as the profit-sharing plan is usually not worthwhile (because the company has already paid heavy taxes, and you will have to pay taxes again, resulting in a very high total tax burden).

2️⃣ Prove independence

To prove you are an "independent contractor," you should establish and maintain written evidence proving that you have:

Control: The right to decide one's own working hours, methods, and locations.

Tools and equipment: Main working tools are provided by the user.

Multiple clients: Serving multiple different clients.

Risk and profit: There is a possibility of making a profit or loss.

3️⃣ Seek professional help and voluntary disclosure

If there may have been errors in previous declarations, you may consider making corrections through the CRA Voluntary Disclosure Program (VDP), which can help avoid hefty penalties and interest.

💡 Special reminder to the trucking industry: The CRA has invested $77 million in strengthening compliance checks on the industry and reinstated penalties for T4A declarations, which carries extremely high risks.

If you have any further questions, we recommend consulting a professional accountant . If you have any specific case studies, please feel free to leave a comment below to discuss them.