How to avoid Independent contractor rules when doing business?

Allan Madan, CA
 Feb 4, 2013

This article will take you through how to avoid the personal services business rules for IT contractors and independent consultants. If you are an IT contractor or independent consultant you should certainly read till the very end.

In my previous article I explained what a PSB or Personal Service Business is. A PSB is an incorporated employee. In other words, in the CRA’s view you would be a regular employee if it weren’t for the corporation. So, if you wish to learn about ways to get around the PSB and independent contractor rules, read on.

Why Should You Care About the PSB Rules?

Well, you should care because if your corporation is deemed to be a personal service business then its tax rate increases from a low of 15.5% to a high of 39.5%, and that’s your hard earned money going down the drain. Now that we know what PSB is, let’s look at how not to get caught by the PSB rules.


In identifying ways to get around the PSB rules, the first thing you must do is exercise control. So, add in your contract that you are to work independently without direct or indirect supervision.

Tools and Equipment

In the contract, stipulate that you will be bringing the tools and equipment required to perform your job. Tools and equipment include software and computers that you would use. Practically, this may be difficult to do because most large companies require that their own software and equipment be used because of IT security reasons.

If that is the case you can bring your computer and software to do support functions related to your job like documenting tasks in a word editor or organizing figures in a spreadsheet. Also keep a computer, a scanner, a printer, a fax, and so forth, in your home office.

Subcontracting Work

Put in the contract that you are allowed to hire sub contractors to help you complete your job. Some customers and employers will absolutely not allow this. If that is the case you should hire an employee to help you with support functions like record keeping, bookkeeping, organizing data, and other small tasks.

Financial Risk

You must demonstrate that you are taking a financial risk in order to avoid being treated as a PSB. In your contract, put in a clause that says you are responsible for incurring any expenses required to deliver your services. These can include expenses like your car, home office, internet, cell phone, and so forth.

Opportunity for Profit

You should demonstrate that there is the ability to earn profit over and above your fixed hourly wage. Consider putting a clause that says that you are entitled to a bonus if certain milestones or goals are achieved.

Financial Dependence

You must demonstrate that you have more than one customer. So, consider taking on other smaller contracts simultaneously so that you have more than one customer.

More Tips:

Here are some other practical tips that you should undertake:
• Maintain a company website.
• State your intention in the contract. This is not an employer employee relationship but is one of an independent contractor and a customer. The courts often look to the intention of an agreement to determine its substance.
• Advertise your business in online directories and consider printing brochures.
• Have a separate business telephone line for your business.
• Get business cards printed and distribute them.

Check out business listings at Tax and Accounting Directory


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 2

  1. My boyfriend contracts to a us firm, he sells us products to a us market, We live in Canada. Can you tell me how I claim this and does he have to pay HST on my income
    Thank you

    1. Debra,

      If your boyfriend’s business is physically located in Canada, and all services are rendered in Canada, then the profits are taxable in Canada. He should not charge HST to his US customers.


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