Fact Sheet - Personal Service Businesses

Reviewed November 3, 2026. Figures are for 2026 unless stated otherwise.

Normally, a Canadian-controlled private corporation in Ontario is taxed on its first $500,000 of active business income at a combined small business rate of about 11.2% (9% federal plus 2.2% Ontario, effective July 1, 2026). This rate compares well against the top marginal tax rates paid by individuals receiving salaries and bonuses.

Some business owners incorporate their businesses and operate through a corporation with the view that they will benefit from the lower Small Business Deduction rate, and will also be able to claim deductions available to businesses.

However, the Income Tax Act treats certain “incorporated employees” differently: a corporation that provides their services can be found to carry on a “personal services business” (PSB). Income from a personal services business is taxed at a much higher corporate rate (44.5% in Ontario: 33% federal plus 11.5% Ontario), and most usual deductions are denied. For example, an IT consultant with a single client who incorporates runs a high risk of being labeled a Personal Service Business and assessed as such for tax purposes.

Once a company is classified as a Personal Service Business, only a few deductions are permitted to reduce the corporate income subjected to the higher tax rate. The key deductions are salaries paid by the corporation to the employee and contributions to benefit plans including pension plans.

Therefore, if a corporation is found to carry on a personal services business, establishing a personal pension plan lets the corporation deduct its eligible contributions against income that would otherwise be taxed at the higher PSB rate.

For example, a $1,000 deductible contribution to the personal pension plan would reduce the corporation’s tax by about $445 in Ontario.