Independent Contractor Incorporation - NOT a Personal Service Business
Contact our law firm for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The primary objective in avoiding the Personal Services Business (PSB) classification is to ensure that, absent your corporation, the Canada Revenue Agency (CRA) would still deem you an independent contractor, not an employee. This rests on the fundamental difference between a contract of service (employment) and a contract for services (business). The CRA and Canadian courts rely on four key common law tests, Control, Tools, Chance of Profit/Risk of Loss, and Integration, to determine the true economic reality of the relationship. A successful strategy requires actively designing your corporate structure and daily operations to demonstrate robust business independence across all four of these criteria, proving that you are running your own distinct commercial venture.
The most decisive factor is the Degree of Control the client exercises over the worker. A true independent contractor dictates how, when, and where the work is performed, focusing only on the final deliverable. To satisfy this test, your contracts should specify the scope of the project and the result expected, rather than detailed instructions on method or schedule. You must avoid being forced to adhere to the client’s internal work hours, mandatory meetings, or organizational policies (like an employee handbook). Actively demonstrating autonomy, such as setting your own project timelines, occasionally performing contract work off-site, and using your own methods, shows the CRA that the relationship is one of two businesses negotiating a result, not an employer managing a subordinate.
Beyond control, your corporation must clearly assume the Financial Risk and Ownership of Assets typical of a business. This means your corporation, not the client, should own and maintain the essential tools and equipment required to complete the work (laptops, software licenses, specialized machinery, etc.). Crucially, your corporation must bear a legitimate Risk of Loss and Opportunity for Profit. If you are compensated by a fixed fee for a project, you bear the risk if the project takes longer than expected; conversely, you realize a greater profit if you complete it efficiently. Furthermore, you must contractually agree to fix any errors or rework the project at your own expense, absorbing financial loss just as any independent business would.
The fourth key factor, Integration, requires your corporation to operate as a distinct entity rather than simply functioning as an integrated part of the client's business. The strongest defense here is client diversification. Having multiple, unrelated clients simultaneously or sequentially in a tax year demonstrates that your corporation is providing services to the market at large, not just functioning as a staff extension for one firm. Even with a single major client, you must maintain your separate business identity, including a dedicated website, business cards, letterhead, separate professional liability insurance, and a primary place of business outside the client's premises.
Finally, while the four common law tests are central, there are two statutory exemptions that automatically preclude PSB status. The easiest to implement, though challenging for a sole practitioner, is hiring more than five full-time employees throughout the year to help you fulfill your service obligations. If this is not feasible, the most important mitigating step is rigorous documentation. Ensure every contract explicitly defines the relationship as one of independent contractor providing a service, including clauses regarding intellectual property, indemnification, and lack of client control. This professional documentation reinforces your intent and provides crucial evidence should the CRA ever audit your corporate status.
At Neufeld Legal, we have the experience and insight to assist you in commencing as an independent contractor, from the establishment of your corporation to reviewing and advising on business contracts. Contact our law firm to incorporate a new corporation or address legal matters pertaining to your commercial pursuits as an independent contractor at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
