On October 31, 2011, the Minister of Finance released draft legislation to amend the Income Tax Act. If enacted, the changes will eliminate the tax advantages associated with having an employee provide services through a corporation known as a Personal Services Business (PSB).
Currently, income earned by an employee through a PSB is subject to a 25% corporate tax rate, compared to the 43.7% top marginal rate for individual tax payers in BC. In addition to a lower tax rate, the PSB provides opportunities for tax deferral and income splitting with family members.
If the proposed amendments are enacted, these tax advantages will be eliminated. The amendments propose to increase the corporate income tax rate on income earned by a PSB by 13% (to 38%). When combined with the personal income tax payable on dividends from a PSB, the overall income tax rate would be higher than it would have been had the income been earned directly by the employee (up to 52% in BC).
Although independent contractors providing services through a corporate entity are not affected by these changes, contractors should nevertheless take note. It is not always easy to determine whether a worker is truly an employee or an independent contractor under the law, but the distinction may have significant taxation consequences.