Tax Considerations for “Artist and Performers” in Canada

The Personal Services Business Versus Corporation – CRA Rules

In recent years, we have seen businesses in many areas of the economy hiring contractors on a long-term basis instead of offering permanent full/part time employment. More recently, we are noticing in some industries, contracts come with the stipulation requiring these individual contractors to incorporate their services through a corporation.

From the perspective of the hiring corporation, this arrangement of hiring incorporated contractors provides staffing flexibility and can reduce costs such as employee benefits, overtime and vacation pay and payroll source deductions such as employee income taxes and CPP/EI premiums.

From perspective of the individual contractor, depending on the circumstances, incorporating can provide significant tax advantages such as:

  • Income Tax Deferral Opportunities.
  • Lower small business tax rates applicable to Canadian Controlled private corporations (CCPCs) earning active business income of $500,000 or less.
  • Allow for numerous business expense deductions.
  • Income splitting options (subject to TOSI rules).
  • Lifetime capital gains tax exemption.
  • Succession and estate planning

While these arrangements have potential to provide benefits to both industry employers and the individual who use the incorporated contractor vehicle, there are income tax obligations of these contracts, especially in cases where they are offering their services to just one organization. Lately, Canada Revenue Agency (CRA) is aware of and has increased the scrutiny of incorporated contractors and classify them as Personal Services Businesses (PSB).

Personal Services Businesses (PSB) rules were applied by Canada Revenue Agency (CRA) to prevent individuals who would otherwise be deemed as employees, from incorporating and taking advantage of these corporate tax efficiencies that are gained from incorporating. These rules were implemented to limit tax advantages to ensure that parties would be considered under contractor/client relationship rather than employee/employer relationship.

What is considered Personal Services Business (PSB)?

The PSB rules as set out in the Income Tax Act subsection 125 (7):

  • An individual who renders services on behalf of the corporation (an “incorporated employee”);
  • The incorporated employee or any related person directly or indirectly owns 10% or more of the issued shares of any class of the corporation or of any related corporation (a “specified shareholder”); and
  • The incorporated employee would be considered an officer or employee of the client but for the existence of the corporation.
  • The incorporated employee does not employ more than five (5) full time employees.
  • The services are not being provided to an associated corporation.

The corporate tax rate that applies to PSB income is 33% federally and 8% provincially if Alberta rates apply (Year 2021), for a combined corporate tax rate of approximately 41%.


Under Personal Services Business regulations, the corporation cannot claim tax deductions except for wages or other remuneration paid through payroll to an incorporated employee and legal fees incurred to collect income. No other deductions are eligible.


In the majority of cases determining whether a contractor or employment relationship exists can be a question of fact and must be reviewed on a case-by-case basis to determine whether these services qualify as PSB. From CRA’s perspective, tests have evolved from case law experience in Canadian courts that can be used to determine whether an individual is an employee or an independent contractor:

  • Degree of control exercised over the contractors activities;
  • Degree of tools and equipment provided by the client to perform the services;
  • Services provided by contractors are integral to the client’s business;
  • Ability to legally hire outside subcontractors;
  • Ability to have an opportunity of profit or risks of loss.

In most cases, these factors are used in assessing whether the individual is providing services to another person as an employee or providing services in a business-like manner.

Looking at some of the recent tax court cases, individual contractors with incorporated businesses held to be carrying on personal services businesses were denied designation of a corporation based on following factors:

  • Lack of marketing, written agreements and invoices provided by the contracting corporation.
  • The corporation did not register and collect GST on services charged.
  • Lack of setting up their own schedule and following a schedule provided by the client.
  • Compensation structure received by the incorporated employee were similar to individuals who worked as full-time employees (fixed bi-weekly/semimonthly/monthly compensation)
  • Dedicated office space provided at the client’s premises.
  • The independent contractor was an integral part of the client’s business.
  • Lack of ability of the contractor to perform similar services to other clients.
  • Client’s vehicle available to use for work purposes (similar access to other employees as well).
  • Contractors have to directly report to the senior management similar to other employees.
  • Contractors who have weekly or biweekly meetings with the client and monitor job performance (similar to an employee performing check ins).
  • Tools and equipment provided by the client such as using the client’s server space, software tools and other in-house tools and equipment of the client (ex: laptops, tablet, cellphone).
  • The independent contractor did not bear the risks of a project running past its deadline or over its budget.
  • The independent contractor was unable to hire outside contractors and oversee the work performed (exemptions from PSB if the contractor can hire more than 5 (five) full time employees).
  • Lack of independence in the context of services to be performed that requires the individual contractor to be present on essentially on a full-time basis.
  • Lack of incurring the risks of financial loss associated with the work performed.


Hypothetically, CRA can assess whether the individual is considered an employee or independent contractor of the client based on the number of the facts and circumstances. In the majority of cases, just having a contractual agreement and existence of a corporation will not always be sufficient as a proof of the contractor/client relationship. CRA reviews and audits the entire situation as a whole.

Independent contractors who actually resemble more like employees and have incorporated, should reconsider their corporate structure. If however, a contractor is required to incorporate due to requirements of the contract services and PSB is unavoidable, then consider paying the entire contract earnings of the corporation to the incorporated employee as salary. However, accrued salary is not deductible; salary and wages are only deductible when they are actually paid. This way the PSB corporation can avoid the higher tax rate. PSB corporation will be subject to income tax withholdings and CPP only (no EI premiums required given that the incorporated employee owns 40% of shares).  Failure to remit can result in a personal director’s liability against the director(s) of the corporation.

Individuals who operate as incorporated contractors, or who are considering establishing a corporate vehicle should seek expert tax guidance and understand the possible adverse tax consequences.

Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact your advisor or accountant to discuss these matters in the context of your particular circumstances. Vartika Satija, CPA, CA (Chartered Professional Accountant) do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.