Management consultant tax: managing personal services business risk before it costs you

Personal services business: the test consultants actually fail

A corporation is treated as a personal services business (PSB) when the person doing the work would reasonably be considered an employee of the client if the corporation did not exist. Consultants are exposed more than most incorporated professionals because the arrangement can genuinely look like employment: one client, a long engagement, client-directed hours, client tools and systems, and no other work on the go that year. If CRA reclassifies the corporation as a PSB, it loses the small business deduction and the general rate reduction, and its deductions shrink to little beyond the salary paid to the person who did the work — a materially higher combined tax cost on the same income.

The defence is built from facts, not from paperwork alone: multiple clients where they exist, deliverable-based contracts rather than time-clocked ones, the corporation's own equipment and tools, and business development activity that a real firm — not an employee — would undertake. We assess this honestly at engagement, not after the fact, because the fix is different depending on whether the facts are actually there.

What a one-client year still lets you deduct

A single-client year is common for a consulting corporation between engagements and is not automatically a PSB problem — the facts around control and integration still matter more than the client count. Where the corporation is not a PSB, ordinary deductions apply: professional liability (errors and omissions) insurance, business development and proposal costs, professional dues and continuing education, travel to the client site, and reasonable home-office costs where the corporation reimburses them. These deductions also do double duty as PSB evidence — a corporation that pays for its own insurance and pursues its own business development looks like a business, because it is behaving like one.

Salary, dividends, and instalments

Once profit is established, the salary-versus-dividend decision shapes your personal tax bill and your RRSP room, since only salary creates contribution room. Consulting income is often lumpy — a strong project quarter followed by a quiet one — which makes instalment planning more than a formality: both the corporation and the owner may owe quarterly instalments, and getting the estimate wrong in either direction either ties up cash unnecessarily or creates arrears interest. We plan the mix and the instalment schedule together each year rather than deciding compensation in isolation from cash flow.

Since 2018, the tax on split income (TOSI) rules also limit how far income splitting through dividends can go: a spouse or adult child receiving dividends generally needs to be excluded from TOSI, most often by being actively engaged in the business, to avoid having those dividends taxed at the top personal rate regardless of their own income level. We check this before recommending a dividend split to family shareholders, not after the T2 is filed.

• Salary creates RRSP room and CPP contributions, and is deductible to the corporation regardless of its tax status.
• Dividends carry no payroll remittance but no RRSP room either, and are taxed differently depending on whether they are eligible or non-eligible.
• A blend is common — enough salary to fund RRSP contributions, dividends for the rest, reviewed annually as income shifts.

Filing around the T2 and the GST/HST return

The corporate return, GST/HST filings, and any provincial obligations run on a schedule set by your fiscal year-end, not the calendar year, and a T2 balance owing is due two months after year-end even though the return itself has a later filing deadline. We coordinate the T2, the GST/HST return, and personal instalments so nothing arrives as a surprise, and we flag the PSB question at year-end review — not just at incorporation — because engagement mix changes every year.

Instalments themselves are a rule of size, not a choice: once a corporation's net tax owing exceeds $3,000 in the current year and either of the two preceding years, monthly instalments become mandatory. A consulting firm coming off a strong project year can trip this threshold for the first time without noticing, and the penalty for underpaying instalments is calculated as interest, not a flat fee, so getting the estimate close matters more than it looks like it should on a $3,000 test.