The associate dentist personal services business trap
Key takeaways
- A personal services business loses the small business deduction, paying about 27 percent on all income from the first dollar.
- PSB status also adds an extra 5 percent federal tax and denies nearly all expense deductions.
- The label on the associate agreement does not matter. CRA looks at the substance of the working relationship.
- An associate who controls their schedule, uses their own tools, and takes financial risk is less likely to be a PSB.
What is a personal services business
A personal services business is a corporation that would be considered an employee of the client if the individual were working directly instead of through their corporation. The CRA looks past the corporate structure and asks: on the facts, does this person work like an employee?
For an associate dentist billing through their own professional corporation, the question is whether the associate is truly operating an independent business or is effectively an employee of the clinic.
What PSB treatment costs
| Item | Normal CCPC | PSB |
|---|---|---|
| Tax rate on active income | about 11% to $500k | about 27% (15% fed + 12% BC) |
| Additional federal tax | none | +5% on taxable income |
| Expense deductions | most business expenses | salary + a few others only |
| Small business deduction | available | not available |
If an associate’s corporation is classified as a PSB, the tax rate jumps from 11 percent to roughly 32 percent on the first dollar of income because the small business deduction is denied and the extra 5 percent federal surtax applies.
The RC4110 test
CRA uses the RC4110 guide to determine employee versus contractor status. The four main factors are:
- Control: who decides when, where, and how the associate works
- Tools: who provides the operatory, equipment, supplies, and assistant
- Profit and risk: who bears the financial risk if revenue is low
- Integration: how embedded the associate is in the clinic’s operations
No single factor decides the question. CRA looks at the whole picture.
How an associate can stay off PSB territory
An associate who wants their corporation to be treated as a genuine business rather than a PSB should be able to show:
- They control their own schedule and set their own hours
- They provide their own instruments or equipment
- They bill patients directly rather than collecting a percentage from the clinic
- They bear the financial risk of uncollected accounts
- They are free to work at multiple clinics
- They hire and pay their own staff
Why this matters: the PSB rules undo most of the tax benefit of incorporation. An associate who incorporated expecting 11 percent tax but gets PSB treatment instead pays nearly three times that rate, and cannot deduct the expenses that make incorporation worthwhile.
What to do if you are at risk
If your associate arrangement looks like an employee relationship on paper, the safest move is to restructure it before CRA audits. Options include working as a direct employee of the clinic, or restructuring the associate agreement to give the corporation more independence.
If CRA reclassifies your corporation as a PSB, you owe the difference in tax, plus interest and penalties, going back to the start of the arrangement, subject to the normal reassessment period.
Frequently asked questions
Can I avoid PSB by incorporating?
No. Incorporation alone does not avoid PSB. CRA looks through the corporation to the working relationship. If the associate would be an employee without the corporation, the corporation is a PSB.
Does PSB apply to specialists the same way?
Yes. The test is the same for general dentists and specialists. It depends on the facts of the working relationship, not the type of dentistry.
What expenses can a PSB deduct?
Very few. Salary and benefits paid to the incorporated individual are deductible, as are certain other expenses. Most office, marketing, and professional development expenses are denied.
Does having multiple clients protect me?
Yes, it helps. CRA considers having more than one client as an indicator that the business is genuinely independent. An associate who works at two or three clinics is harder to classify as a PSB.
If I rent a chair, am I safe?
Renting a chair and controlling your own schedule is a strong indicator of independence. If the clinic controls every aspect of your work, chair rental alone may not be enough.
Talk to us about your associate structure at ghumans.ca/accounting-for-dentists.
General information only. Talk to us about your situation.