Personal Services Business Payroll in Ontario: How the Owner Should Get Paid

Ali Alsharif, CPA, MPAcc — Chrome Accounting

Short answer: If your corporation is (or might be) a personal services business (PSB), pay yourself T4 salary, withhold income tax and CPP, remit those amounts to the corporation’s payroll (RP) account by the due dates, and leave little or no profit in the company. A 100% shareholder cannot claim EI on that salary. Dividends and invoicing yourself “management fees” do not fix a PSB.

This is the pattern Chrome Accounting sees with incorporated contractors in Ontario: money already left the company as draws, there is no payroll account, and year-end is close.

What a personal services business is

The Income Tax Act treats a corporation as a PSB when the worker would be an employee of the payer if the corporation did not exist — the “incorporated employee” test.

Typical facts:

• One person does the work
• One or two clients
• The client sets hours, tools, or how the work is done
• The corporation has no other employees who do the same work

A PSB does not get the small-business deduction. Combined federal and Ontario tax on leftover profit is about 44.5%. Deductions inside the company are tightly limited. The deduction that still works is salary paid in the year to the person who did the work.

Two clients in a year helps the analysis. It does not automatically mean you pass.

Salary vs dividends vs invoicing your own company

Paying “enough salary to zero the profit” is normal for an active owner-manager. Section 67 still says salary must be reasonable. CRA generally does not challenge salary paid to a Canadian-resident shareholder who does the work, out of the profits that person earned. That is stronger in a PSB, because the income is labour income.

Do not bonus out investment income or unrealized gains the same way. Bonus the business result. For the broader trade-offs outside a PSB, see Salary vs. Dividends: How Ontario Owner-Managers Should Pay Themselves.

EI if you own 100% of the shares

Employment by a corporation is not insurable if you control more than 40% of the voting shares (Employment Insurance Act s. 5(2)(b)). 100% is over that line. The rule is automatic.

• Do not deduct employee EI
• Do not remit employer EI
• T4 boxes for EI insurable earnings stay $0
• You cannot claim regular EI from this job
• Remitting EI anyway does not create insurable hours

Parental or sickness coverage is a separate program: EI special benefits for self-employed persons. Register with Service Canada. It is not T4 payroll EI, and it does not pay regular unemployment if contracts stop.

CPP still applies. Employee and employer each pay CPP and CPP2 up to the annual maximums.

Cash in the company is not the same as T4 gross

Employer CPP is paid by the corporation on top of salary.

If the company will only have $138,000 of cash for compensation this year:

A $138,000 T4 on $138,000 cash is short by the employer CPP. Size the salary so tax, employee CPP, employer CPP, and net cheques all fit the cash that is actually there.

Draws already taken with no payroll

Treat amounts already transferred to the owner as salary already paid. Open an RP account. Remit the tax and CPP that should have come off those amounts. Reduce later net cheques so the owner is not paid twice on a net basis.

Do not wait for the T4.

CRA matches the T4 Summary to the RP account. Filing a T4 in January without remittances during the year does not hide late payroll. The bill for late remitting is usually automatic. A full audit of each pay date is less common than a balance owing on the payroll account.

New employers with monthly withholdings of $1,000 or more are monthly remitters. Deductions from an October payday are due the 15th of November (next business day if the 15th is a weekend).

First-year penalties if remittances start late

If draws went out for months with no RP account, and you remit the catch-up as soon as the file is set up:

• Interest accrues at the prescribed overdue rate (7% through 2026) from each missed due date
• Failure-to-deduct can be 10% of the amount that should have been withheld
• First-year, first payroll, paid as soon as the error was fixed, is the fact pattern for taxpayer relief (RC4288)

Waiting until the T4 in February to send the whole year’s source deductions makes relief harder and interest larger.

What “on time” looks like for the rest of the year

Once catch-up is remitted:

1. Set a monthly gross that uses the remaining cash after employer CPP.
2. Pay the owner a net cheque.
3. Remit tax + employee CPP + employer CPP to RP0001, not the owner’s personal tax account.
4. Use CRA’s Payroll Deductions Online Calculator with EI exempt, and do not enter a catch-up bonus and the next month’s salary on the same run. That annualizes the monthly pay as if it were a $400,000 salary.
5. Issue one T4. EI boxes nil.

HST collected and HST remitted live on the GST/HST account. They are not part of the payroll $138,000.

What not to do

• Do not leave PSB profit in the company to “use the small-business rate.” That rate is not available.
• Do not invoice the corporation from yourself instead of running payroll.
• Do not deduct EI on a 100% shareholder.
• Do not treat software’s monthly annualization as the tax bill for the year.
• Do not combine a catch-up bonus and the next salary in one PDOC calculation.

How Chrome Accounting handles these files

Chrome Accounting is a virtual CPA Ontario firm. For incorporated contractors who may be a PSB, the work is:

• decide whether salary, dividends, or a loan is the least-bad description of money already taken
• open or use the RP account
• size salary so employer CPP still fits the cash
• set remittance dates
• file the T4 so it matches what was remitted

That work sits alongside our corporate tax filing, compilation engagements for year-end financials, and personal tax for business owners, so the T2, the T4, and your T1 tell the same story.

If you have already taken draws and have no payroll account, Contact Us before the next transfer.

FAQ

Can a PSB pay dividends instead of salary?

It can, but dividends are not deductible. The profit is taxed first in the company at PSB rates. Salary paid in the year is the deduction that still works.

Does having two clients mean I am not a PSB?

Not by itself. Two clients helps. Control, tools, substitution, and whether you look like an employee of the payer still decide it.

If I own 100% of the company, can I opt into EI on my T4?

No. More than 40% of the voting shares means the job is not insurable. Use the self-employed special-benefits program if you want parental or sickness coverage.

Is employer CPP paid from my net pay or from the company?

From the company, on top of gross salary. That is why $138,000 of cash does not support a $138,000 T4.

Can I file one T4 in January and remit everything then?

You can file the T4 in January. You cannot treat that as on-time remitting. CRA compares the T4 to when money hit the RP account.

Does the salary have to be reasonable?

Yes, under section 67. For the owner who earned the business profit, CRA rarely treats “bonus down to nil” as excessive. Salary to a family member who did not work is a different problem.

What payroll account do remittances go to?

The corporation’s RP0001 account, not the owner’s personal tax line.

This article is general information for Ontario owner-managers and Canadian employers. It is not a CRA ruling, a legal opinion, or advice for a specific person. Whether a corporation is a personal services business depends on the facts of each contract. CPP, CPP2, prescribed interest rates, and remitter thresholds change each year; figures above are illustrations. Do not change payroll, file T4s, or request relief from this page alone. A CPA Ontario firm can review your contracts, draws, and payroll account and apply the Income Tax Act, Canada Pension Plan, and Employment Insurance Act to your situation.