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Carolyn Bamford is one of a growing sector of people who are setting up themselves up as corporations, making themselves a small business for tax purposes.

Glenn Lowson/The Globe and Mail

Carolyn Bamford worked in information technology at a large insurance company for about 10 years before deciding to go it alone.

She set up her company, Toronto-based Ajira Inc. (which means "agile" in Sanskrit), three years ago and has since taken on a handful of large and small projects from multiple clients.

"I like that I can do different things," says Ms. Bamford. "I have a big project now that I'm enjoying, but it's also nice to switch to something completely different. You can change your mindset and come back to the other project refreshed."

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Ms. Bamford is the only employee at her corporation, but she hires subcontractors when she needs help. Taking on more than one client and occasionally hiring contractors ​are moves that are not only a good idea for her business, but help to ​satisfy the Canada Revenue Agency (CRA).

The CRA has been known to challenge contract workers on whether they fall into the category of a personal services business (PSB), which means they are considered an employee instead of being self-employed. For contractors who incorporate, it is important to take steps to act like a corporation, business experts say.

Being designated a PSB has big disadvantages. Your business can't claim the small-business tax deduction or be taxed at the small-business rate, nor will it qualify for the general corporate rate reduction.

For instance, a PSB in Ontario would pay a combined federal-provincial income tax rate of 39.5 per cent, while the federal-provincial small-business income tax rate is 15 per cent. Being designated a PSB also restricts the types of expenses that can be claimed.

"You can't – and wouldn't want to – designate yourself as a personal services business," says Andrew Zakharia of Toronto-based AZ Accounting Firm. "It negates the entire purpose of setting up the corporation."

Mr. Zakharia says the term "personal services business" can be confusing since many small businesses, from hairdressers and personal trainers to accountants and lawyers, provide services. A PSB is essentially an incorporated employee, and it's up to the business to ensure that it's not viewed that way by the CRA.

It has become a major issue in recent years as consultant-dominated industries such as IT have been encouraged by staffing agencies to incorporate, so they can be hired by government and large companies. More temporary workers are on the market today, too – they made up about 13.3 per cent of the Canadian work force in 2016, according to Statistics Canada, up from 11.3 per cent in 1997.

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More companies are also interested in hiring contract workers to help with short-term projects and keep down costs associated with full-time workers, such as pensions and benefits.

These employment trends have the CRA paying closer attention to the contractor-company relationship, accountants say.

Mr. Zakharia says clients can demonstrate they are not a PSB by setting up a website to promote their business, having more than one client, signing shorter-term contracts (he recommends three to four months at a time) and hiring subcontractors where possible.

He also recommends being paid at a contract rate instead of an hourly rate. Or, if it's an hourly rate, it should have a clause saying that the work has to be completed before you get paid.

"You need to have some risk related to your earnings. That's one of the things they [the CRA] look at as a factor, " he says. For instance, an employee would still be paid if he or she worked 10 hours and didn't finish a project.

"As a business, if you don't finish the work, you don't get paid," he says. "Or if you do something wrong you can be liable. Then there's some risk tied to your pay, which is more businesslike."

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Justin Wood incorporated his company, the Toronto-based digital marketing firm Krftwrk, earlier this year so he could grow and reinvest in the business at a lower tax rate. Having a corporation also allows him to shift the liability for his work – and that of his contract employees – to the corporation.

"It's not something that's on the top of their mind, but it's nice to have," says Mr. Wood. It also helps to attract and retain talent.

Incorporating can also add credibility to a business, and some larger companies require contractors to be incorporated before they can be hired for a project.

"If you really want to grow your business, the corporation is where you've got to be," Mr. Wood says.

‘Within innovation you have to be ready to win and to get half-successes’ Special to Globe and Mail Update

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