Potentially Adverse Tax Results For Incorporated Employees

On October 31, 2011, the Department of Finance proposed changes to the Income Tax Act that effectively put an end to the potentially advantageous tax planning strategy of having an employee agree to provide their services to their employer through a corporate entity (a "Personal Services Business"). The proposed legislation creates a potential significant tax cost to taxpayers who are currently in this structure.

Up until these proposed changes were announced, Personal Services Businesses that earned service fees which would otherwise have been paid to an individual employee were subject to a 25% corporate tax rate. Compare this with the top marginal rate for individual taxpayers (in BC 43.7%), and one can see the tax deferral opportunity this structure created. In addition to a tax deferral, there was the opportunity for a taxpayer to use the Personal Services Business as a mechanism to income split with low income family members.