This change is already generally effective for tax years ending on 30 November 2012 and later.
The changes for personal services businesses are included in Bill C 48, a large bill of outstanding technical tax amendments. The bill received first reading in the House of Commons on 21 November 2012, and is currently working its way through the parliamentary process. It is expected that the bill will be passed into law soon.
Affected taxpayers will need to evaluate the impact of the tax rate increase on their personal services business and decide what to do with an existing corporation.
Read a March 2013 report prepared by the KPMG member firm in Canada: Personal Services Business Tax Hike Becoming Law — Time for a New Plan
A corporation may be considered a personal services business if it provides services on behalf of itself to another company, and it would reasonably be considered an employee or officer of the company to which services are provided, but for the existence of the corporation.
If a corporation employs more than five full-time employees or it provides services to an associated corporation, it will generally not be considered a personal services business.
A personal services business is not eligible for the small business deduction, and the expenses it can deduct for tax purposes are severely restricted. In general, a personal services business’ deductible expenses are restricted to salary and wages paid to an incorporated employee. No deduction is available for costs such as training employees, transportation, and advertising.
These rules were introduced to prevent employees from terminating their employment agreements and entering into contracts with their previous employer through their own corporation to obtain tax advantages.