IT consultant tax services: PSB risk, the small business deduction, and US-client HST

What PSB reclassification actually costs

A personal services business finding is the worst outcome available to a one-person corporation, and it is worth stating the damage precisely. If CRA decides you would reasonably be an employee of your client but for the corporation — and your corporation does not employ more than five full-time people — the corporation loses the small business deduction, loses the general rate reduction, and pays an additional 5% federal tax on top. Deductions collapse to essentially the salary paid to you and a short list of items.

Reassessments typically arrive years after the fact and cover multiple years at once, with interest. That is why we treat PSB exposure as a standing agenda item, not a one-time question at incorporation.

Keeping the small business deduction is about facts, not contract wording

The factors CRA and the courts weigh are the classic employee-versus-contractor tests: who controls how and when the work is done, whose equipment you use, whether you can subcontract, whether you carry financial risk, and how many clients you serve. A contractor on one client's standups, laptop, and vacation calendar for three straight years looks like an employee no matter what the MSA says — a well-drafted contract helps only when the facts behind it hold up.

The practical moves are unglamorous but effective: keep at least one secondary client or product revenue stream where you can, invoice for deliverables rather than hours where the engagement allows, use your own equipment, carry your own insurance, and control your own hours. We review the fact pattern annually and tell you plainly when an engagement is drifting into employee territory, so you can decide with open eyes rather than find out from an auditor.

SR&ED belongs to whoever paid for the work

Contractors who build product between engagements often sit on a legitimate SR&ED claim without knowing it — and others claim client work that was never theirs to claim. The dividing line is who bore the cost and kept the rights: development your client paid for is generally the client's claim, and contract payments reduce yours. Work on your own IP — a novel sync engine, a performance problem with no documented solution — can qualify when there is real technological uncertainty, and a CCPC earns a 35% refundable credit on qualifying expenditures.

The claims that survive review are the ones documented while the work happened: commit history, tickets that state what was attempted and why it was uncertain, and time records splitting product work from billable work. We help set that up before year-end, because a claim reconstructed in April reads like one.

HST with US clients: zero-rated, not exempt — the difference is money

Services supplied to non-resident clients are generally zero-rated: you charge 0%, but you are still making taxable supplies. That has two consequences contractors miss. First, zero-rated sales count toward the $30,000 registration threshold — an Ontario dev billing only a US startup still has to register. Second, registration is what unlocks input tax credits on your Canadian costs — hardware, software subscriptions, co-working space, accounting fees — so each HST return becomes a small refund rather than nothing.

For Canadian clients, place-of-supply rules set the rate by the client's business address: 13% for an Ontario client, 5% for an Alberta one. The American side of the relationship — W-8BEN-E requests, whether you owe US tax without a permanent establishment, protective filings — is a separate discipline we cover on our cross-border tax page for IT consultants.

Source: CRA — GST/HST for businesses.