Avoiding Personal Services Business Classification

There are many relief and locum pharmacists who open a corporation to operate their business. But simply having a corporation doesn't mean that the CRA will necessarily treat you as such. The CRA will look at your whole working relationship to determine whether or not you are operating as an employee or an independent contractor (regardless of whether you run it through a corporation)

The issue revolves around what's called a Personal Services Business (or PSB) classification. If the CRA determines that you're acting more like an employee rather than an independent contractor, they could assign this punitive classification to you (which not only strips you of the benefits of having a corporation but may also bring penalties). It is really important that if you choose to incorporate your practice, you take the time to understand the PSB rules and ensure that you are onside with the testing criteria.

From a tax perspective, if you get hit with a PSB classification, it means you're going to be taxed at a much higher rate than regular active business income, and also lose access to the small business deduction. You're also charged an additional 5% federal tax on top of everything else, bringing you to a total federal tax rate of 33%, compared to 9% for a corporation claiming the small business deduction. It also limits what you're able to write off as a business expense, meaning fewer of your expenses are going to be eligible, resulting in a higher taxable income .

One of the more frustrating things about this classification is that there is no strict, rigid checklist of things that you must do in order to avoid being classified as a PSB.

Instead, the CRA and the courts look at the entire working relationship. The CRA summarizes them in its guide RC4110, Employee or Self-Employed? It is important not to consider these factors as definitive, as none of these in isolation is guaranteed to prove your case.

Here are some questions you should consider:

1. Do you decide when, where and for whom you work? Pharmacists exercise professional judgment whatever their status, so the focus is usually on whether you choose your shifts and can decline work without consequence.
2. Do you set or negotiate your rates, invoice for your services, and pay your own business costs?
3. Do you bear the cost of a cancelled shift or an unpaid invoice?
4. Who owns your tools? Relief pharmacists generally work in the pharmacy's dispensary using its systems. In other lines of work, that factor might point toward employment, so for relief pharmacists, the other factors need to carry more weight.
5. Do you have multiple clients? Do you work for several unrelated pharmacy owners, or mostly for one owner or group of stores?
6. Do you have a written agreement that governs your independent contractor relationship, and does your actual day-to-day work follow it?

When you're an employee, you typically only work at a single location or multiple locations owned by the same individual who owns a string of pharmacies. Employees don't typically have a lot of autonomy over their work. You're given a schedule that you have to follow and a set number of hours that you must work. Declining a shift would typically require using sick leave or annual leave, not simply up to your discretion. These are the sort of things that the CRA would consider when choosing to classify you as a PSB instead of a Professional Pharmacist Corporation. Again, this is not an exhaustive checklist and you cannot simply action a couple of these items and assume you are in the clear. The language used around these classifications is evolving, and changes based on real world case law that may capture new activity that might indicate an employee rather than a self-employed contractor.

There are a lot of benefits to having a professional pharmacist corporation. If you choose to go that route for your locum work, ensure that you're taking the steps necessary to protect your classification and enjoy the full benefits of your corporate structure.

• Having a corporation isn't enough. The CRA doesn't automatically treat you as a corp just because you've set one up.
• Test yourself against the CRA criteria: Honestly check your work structure against the factors considered by the CRA.
• Revisit periodically. Your work may change over time, so it's important to test your work against the criteria every year or so to ensure you haven't drifted into PSB territory.

Related Pharmacist Resources:
"Employee vs. Self-Employed:" A Guide for Canadian Relief Pharmacists. If the CRA decides you’re really an employee of the pharmacy, your corporation can end up paying more tax than you would have paid without one. This free eBook shows how the CRA makes that decision, and how to check where you stand.

Deciding Whether to Incorporate: important considerations for pharmacists deciding on their structure.

Paying Yourself Salary vs. Dividends: Incorporated pharmacists can pay themselves is several ways. Here are there trade offs.

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