Taxes for consultants in Canada: personal services business rules

Consultants, corporations and the CRA

Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month.

The flat yearly price covers everything tax for the year: the corporation's T2, or the T1 with T2125 for a consultant who isn't incorporated, plus the owner's T1 when the business income needs it and information slips such as T4 and T4A. Canadian customers pay the same number in CAD. Our team prepares and files the returns.

The CRA notes that incorporating to provide services is more common in some industries, including professional, scientific and technical services, construction, and trucking, transportation and warehousing. The person who performs the services for the corporation is called an incorporated employee. The client is the payer and the corporation is the payee.

• CRA: What is a personal services business

The five conditions for a personal services business

Under the Income Tax Act, a corporation's business of providing services is a PSB only if it meets all five of these conditions. If any one is missing, it isn't a PSB.

• The worker provided their services through a corporation
• The worker, or a person related to them, was a specified shareholder: generally someone who owns at least 10% of the issued shares of any class of the corporation or a related corporation at any time in the year
• The corporation employs 5 full-time employees or fewer throughout the year. A full-time employee works a full business day on each working day of the year, apart from normal illness or vacation
• The amounts the corporation received for its services weren't paid by a corporation associated with it in the year
• If the corporation didn't exist, the worker would reasonably be considered an employee of the client

• CRA: Determine if the worker's corporation is carrying on a PSB
• CRA: T4012 Chapter 4, Page 4 of the T2 return

How PSB income is taxed

PSB income isn't eligible for the general tax reduction or the small business deduction. It pays the full federal and provincial corporate rates plus an additional 5% tax. The T4012 guide says a corporation adds 5% of its taxable income from a PSB to its Part I tax (section 123.5).

The basic federal rate of Part I tax is 38%, or 28% after the federal tax abatement of 10% of taxable income earned in a province or territory. Other corporations get the general tax reduction down to 15%, and Canadian-controlled private corporations claiming the small business deduction pay 9% federally. PSB income stays at 28% and adds the 5%.

Provincially, PSB income falls under the higher rate, which applies to all income not eligible for the small business deduction.

• CRA: What is a personal services business
• CRA: Obligations of a PSB or its payer
• CRA: T4012 Chapter 7, Page 8 of the T2 return
• CRA: Corporation tax rates

The four deductions a PSB can claim

A PSB can deduct only these expenses, reported on Schedule 125. Any other expenses are denied and added back on Schedule 1.

• Salary, wages or other pay to the incorporated employee
• Benefits or allowances provided to the incorporated employee
• Certain expenses of selling property or negotiating contracts
• Legal expenses paid in the year to collect amounts owed for services

• CRA: T4012 Chapter 4, Page 4 of the T2 return
• CRA: Obligations of a PSB or its payer

Filing a T2 as a PSB

The CRA's PSB page lists where the income goes on the T2: line 520 of Schedule 7 (not eligible for the small business deduction), line 432 of the T2 (not eligible for the general tax reduction) and line 555 (subject to the additional 5%). The small business deduction isn't claimed on line 430.

The corporation opens a payroll account and files information returns if it pays employees or self-employed workers, including when the employee is also the specified shareholder, even if no withholding is required. Pay or dividends to the owner go on the owner's T1, from a T4 or T5 slip. If the corporation earns more than $30,000 over the previous 4 (or fewer) consecutive calendar quarters, it generally opens a GST/HST account and collects, files and remits the tax.

The T2 is due within six months of the end of the tax year. The three-month balance-due day applies only to CCPCs claiming the small business deduction for the year or allowed it the year before, so a corporation with neither has the general two-month balance-due day. Late filing costs 5% of the unpaid tax plus 1% for each complete month, up to 12 months.

• CRA: Obligations of a PSB or its payer
• CRA: Requirements for the trucking industry
• CRA: T4012 T2 Corporation Income Tax Guide, Before you start

What clients report when they pay a consulting corporation

Generally, the client gives the corporation a T4A slip with the fees paid for services. Depending on the situation, it may issue a T4A-NR, T5018 or T1204 instead.

For a Canadian resident recipient, the client doesn't withhold CPP, EI or income tax and reports the fees in box 48 of the T4A, without GST/HST or PST. Under CRA policy a slip is needed if total payments in the calendar year were more than $500 or tax was deducted. For a non-resident providing services in Canada, the client withholds 15% income tax and reports on a T4A-NR.

For the 2025 tax year, the CRA gave February 28, 2026 as the date for box 048 reporting, with returns on time if received or postmarked by March 2, 2026 because February 28 fell on a Saturday.

• CRA: Obligations of a PSB or its payer
• CRA: Payments of fees for services
• CRA: Requirements for the trucking industry