Special Rules for Corporations Carrying on a Personal Services Business

Note
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Like all corporations established in Québec, corporations carrying on a personal services business (PSB) are subject to Québec income tax and must file an income tax return.

In addition, special rules apply to corporations carrying on a PSB to ensure that individuals cannot avoid paying their fair share of income tax by interposing a corporation between themselves and a person with whom they have an employee-employer relationship.

Restrictions on deductible expenses

A corporation cannot deduct most usual business expenses from its PSB income. For example, it cannot deduct expenses for:

  • office supplies;
  • travel;
  • meals;
  • a cellphone.

Deductible expenses are limited to:

  • a salary, wages or other remuneration paid in the year to the incorporated employee;
  • the cost to the corporation of an allowance or a benefit granted in the year to the incorporated employee;
  • an expense which, had it been paid by an individual, would have been deductible from the income from an office or employment connected with the selling of property or negotiating of contracts;
  • an amount the corporation pays in the year as judicial or extrajudicial expenses to recover an amount owing to it for services it provided.

A corporation carrying on a PSB therefore cannot deduct, for example, capital expenditures or capital cost allowance.

Note
If the corporation carries on another business in addition to the PSB, it can deduct expenses for that other business since the PSB restrictions will not apply.
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Deemed benefit

A corporation that carries on a PSB in the taxation year or that carried on a PSB in a previous taxation year must include in its income for the year every amount that is deemed to be a benefit received by the corporation if a person contracts a debt because of: 

  • services provided or to be provided by the corporation;
  • the individual's previous, current or intended office or employment.
Taxation rate

A corporation cannot claim the small business deduction for PSB income because it is not considered income from an eligible business. The general corporation income tax rate therefore applies to PSB income.

For more information, see Calculation of the Income Tax of a Corporation.

Tax credits

A corporation carrying on a PSB may not be able to claim some tax credits for a taxation year. Contact us for more information. 

For more information, see interpretation bulletin IMP. 135.2-1/R1, Personal services business, on the Publications du Québec website.

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