Why Should IT Consultants Care about PSB Rules?

Reviewed November 3, 2026. Rates in the text are current for 2026; the worked example uses earlier figures for illustration. Ask INTEGRIS for a current illustration.

In short, because Personal Service Business rules virtually negate the tax advantages of having incorporated in the first place. An example provides some context.

Take an IT consultant whose company has a taxable income of $100,000.

If the IT company claims the small business deduction tax rate, in Ontario it would pay corporate income tax at a rate of 12.2% ($12,200) under the rates used in this example (about 11.2% for income earned after June 30, 2026) and would have $87,800 available for distribution as dividends.

If this $87,800 is paid out as a dividend to the consultant, additional personal taxation in the IT consultant’s hands occurs. To calculate taxes payable, the dividend is first ‘grossed up’ and tax applied at personal marginal rates, and then a dividend tax credit is applied to reduce the overall taxes payable on the grossed-up amount.

In Ontario, an IT consultant whose only source of income is a “non-eligible” dividend1 of $87,800 would pay net personal taxes of $12,446 after deducting basic personal & dividend tax credits, leaving him or her with a net after-tax income of $75,354.

The following table summarizes the situation:

However, if the CRA finds that the same IT company carries on a personal services business (PSB), a “personal services corporation” (“PSC”) for short,2 its corporate tax rate jumps to 44.5%, so tax on $100,000 of corporate income rises to $44,500 ($32,300 more than in the normal case in this example).

The PSC, having paid $44,500 in taxes will therefore only have $55,500 to distribute in dividends. However, because PSB income is taxed at the full corporate rate, it adds to the corporation’s general rate income pool, so dividends paid from it can generally be designated as “eligible dividends”, which are taxed more lightly in the IT consultant’s hands.

In our example, we assume the $55,500 distributed via “eligible” dividends out of the PSC attracts no additional personal tax (after the application of personal & dividend tax credits), leaving the IT Consultant with $55,500 in net after-tax income.

In comparing the two tables we can see that the tax leakage has jumped from $24,666 to $44,500 - an increase of 80% in taxation!

What if I cannot avoid the PSB Designation?

The Income Tax Act (Canada) is very clear as to which corporate deductions are permitted to a PSC – and there are very few. Chief among them are salaries paid and the cost of benefit plans including pension plans.

Therefore, in the example above, the IT Company making $100,000 could reduce its taxable corporate income by: (1) participating in a personal pension plan and (2) paying a salary.3

By way of illustration, a salary of $60,000 could be paid to the IT consultant. Given the current 2021 federal and Ontario tax brackets, personal income taxes payable would be $10,568, leaving $49,432 of after-tax income. At $60,000 of salary, a 50-year-old IT consultant saving through a personal pension plan would be able to contribute $12,553 as a tax-deductible contribution.4

The IT Corporation’s taxable corporate income would be as follows: $100,000 - $60,000 (salary) - $12,553 (pension contribution) = $27,447. At the PSC tax rate of 44.5%, this translates into corporate taxes of $12,213.5 (To avoid paying any corporate tax at all, the salary and pension contributions could be increased.)

At the end of the process, the IT consultant would have $49,432 in after-tax dollars from his or her salary, plus retained earnings in the corporation of $15,234. Moreover, the pension plan now has $12,553 growing without immediate taxation until retirement.6

By contributing to the personal pension plan, the IT consultant has saved $5,586 (44.5% x $12,553) in corporate taxes. If dividends are paid on the retained earnings of $15,234, this would leave an additional $13,900 of after-tax income to be added to the consultant’s after-tax salary of $49,432 for a total take-home pay of $63,332.

To this, one must also keep in mind that there is also a pension plan available with $12,553. In the PSB “no salary” illustration, the net after-tax income was $55,500 with no pension plan.

We summarize this solution for a PSB IT company below:

This tax leakage of $24,115 compares favourably with the total taxes payable with the IT Corporation is eligible for the small business rate of 12.2% ($24,666) but also provides for a pension plan in retirement. It also carries about 46% less tax than if the corporation is found to carry on a personal services business and relies on dividends for compensation.

**Bottom Line **

In short, the use of salary and pension deductions has converted a large percentage of the tax that would have been payable to the Canada Revenue Agency into a pension entitlement. While the IT consultant’s take-home pay is $12,022 lower, the $12,553 accumulated in the pension plan means he or she is economically better off by about $530.

The following graphs provide a snapshot of the 3 illustrations: 

**Footnotes **

1 It is considered non-eligible because the corporation paying it is taxed at the lower small business rate (12.2% in Ontario in this example).

2 A corporation carries on a personal services business when the consultant (or a related person) is a specified shareholder and, but for the corporation, the consultant would reasonably be regarded as an employee of the client, unless the corporation employs more than five full-time employees throughout the year. Having a single client is a risk factor, not the legal test.

3 Salaries are taxed according to graduated tax brackets. Lower salary amounts pay disproportionally less tax than higher salaries.

4 On $60,000 in salary, the IT consultant could also contribute up to 18% or $10,800 to a Registered Retirement Savings Plan (RRSP) instead - with similar tax consequences.

5 For the sake of simplicity, we have excluded CPP premiums and Employment Insurance. CPP is deferred income since it builds a pension entitlement later in life and is not a tax, and Employment Insurance may not apply where the owner/operator of the company owns shares in the IT company.

6 If the IT consultant retires at age 65 and keeps a $60,000 salary for the next 15 years, the plan could accumulate about $325,000, assuming investment returns equal to the 7.5% interest rate the Income Tax Regulations require for IPP funding calculations; actual returns will vary. Of that amount, $136,695 is interest that has accumulated in a tax-deferred environment.