The finding arrives in three steps, and the first step decides most of the outcome
A personal services business finding does not arrive as a surprise bill; it arrives as a sequence, and each step gives you a window that closes. The first is usually a questionnaire, sent to your corporation and sometimes to your client, asking who set your hours, whose equipment you used, whether you could send a substitute, how many clients you had and how the engagement was described internally. The second is a proposal letter: the auditor tells you they intend to treat the corporation as a PSB for named years, shows the proposed adjustments, and gives you a short period, typically 30 days, to respond with facts and documents. The third is the notice of reassessment itself, which turns the proposal into a debt with interest running.
| Stage | What you receive | Your window | What to do with it |
|---|---|---|---|
| Questionnaire | Questions about control, tools, risk, substitution and client count, often sent to the client as well | The date on the letter, usually a few weeks | Answer accurately and consistently with the contract; do not guess or improve the facts |
| Proposal letter | The years, the adjustments and the auditor's reasoning | Typically 30 days, extendable on request | Rebut with documents: contracts, invoices to other clients, insurance, proof of your own tools |
| Notice of reassessment | The revised tax, the extra 5 per cent, the denied deductions, arrears interest | 90 days to file a notice of objection | Object if the facts support it; pay or arrange payment to stop interest either way |
| Objection decision | Appeals confirms, varies or vacates the reassessment | 90 days to appeal to the Tax Court | Weigh the remaining amount against the cost of an appeal |
The reason the first step matters most is that the questionnaire is the file. Auditors compare your answers to your client's answers and to the contract, and an inconsistency between the three is harder to repair at the objection stage than a weak fact stated honestly. If you have already received a letter, the general playbook in what to do after receiving a CRA audit notice applies, with one PSB-specific addition: get your contract, your invoices and your client's likely answers in front of a CPA before you write a word back. The tests themselves are explained in what is a personal services business; this page is about what happens once CRA has applied them against you.
What gets reassessed: five adjustments stacked on every open year
Five things happen to each reassessed year at once, and they compound. The small business deduction is denied, because PSB income is carved out of the active business income it applies to. The general rate reduction is denied too, so the income does not even get the general corporate rate.
The additional 5 per cent federal tax on PSB income is added. Every deduction other than salary, wages and benefits paid to you, plus a narrow band of employment-type expenses, is added back to income, so your home office, software, vehicle, professional fees and insurance become taxable profit. And arrears interest runs from each year's balance-due day to the day you pay, at the prescribed rate plus four points, compounded daily.
Which years are open is the next question, and for a Canadian-controlled private corporation the normal reassessment period is three years from the date of the original notice of assessment for each year. A corporation that files on time therefore typically has three years exposed, and a PSB audit usually reassesses all of them together. CRA can reach further back only where it can show a misrepresentation attributable to neglect, carelessness or wilful default, or where you signed a waiver; a corporation that claimed the small business deduction in good faith on a defensible reading of its facts is normally not in that territory, but a corporation that ignored its own accountant's written warning may be. Gross negligence penalties are possible on the same reasoning and are the exception rather than the rule in PSB files.
The corporation's other income is not swept in: interest on its bank balance or genuine active income from a second business keeps its ordinary treatment, because the rules apply to the income from the personal services business, not to everything on the T2. Most one-person corporations have nothing else, which is why the reassessment feels like it took the whole company.
The double-tax shape when the profit already went out as dividends
The worst version of this finding is the one where the corporation kept its profit at 12.2 per cent, paid it to you as dividends over the following years, and is now told the corporate tax was roughly 44.5 per cent all along. The dividends are not reversed. They were valid when paid, and you paid personal tax on them. What changes is the corporate layer underneath: the extra corporate tax is now owed on income that has already left the company, and the corporation has to find that cash from somewhere, which usually means you, lending it back or paying it in.
On the ordinary path the corporation paid 12.2 per cent, and the dividend gross-up and credit were designed so that your combined tax landed close to what salary would have cost. On the reassessed path the corporation paid roughly 44.5 per cent, and your dividend credit does not grow to match it, because the credit assumes ordinary corporate rates whether or not the dividend was designated as eligible. The combined corporate and personal burden on that money therefore lands well above the top personal rate, above what your client would have withheld had it simply put you on payroll. There is no mechanism to reclassify a paid dividend as salary after the fact, and no refund of the personal tax to offset the corporate bill.
The shape is much less severe for a corporation that paid its profit out as salary, because salary to the incorporated employee remains deductible even to a PSB. A corporation that bonused down to a small profit each year is reassessed on that small profit plus the denied expenses, and the arithmetic is annoying rather than ruinous. This asymmetry between dividends and salary, and why it dominates every payment decision once the label is on the table, is worked through in how the owner of a personal services business should pay themselves.
What does not change, and why that is cold comfort
A PSB finding changes the income tax on the corporation's profit and nothing else, which cuts both ways. The HST you charged your client and remitted was correct and stays correct, because HST turns on whether the corporation made taxable supplies, not on the income tax character of the profit; your input tax credits stand too. Your corporation remains your employer for CPP purposes, and you do not become the client's employee for CPP, EI, vacation pay, employment standards or severance. The client's obligations do not shift either: the finding is made against your corporation on your facts, and it does not by itself create payroll withholdings for the client, which is precisely why clients and agencies insist on the corporate structure.
The corporation also continues to exist and to file. You do not re-file the reassessed years, and the corporation's year-ends, bank accounts and contracts are untouched. PSB status is decided year by year, so a finding for the last three years is strong evidence about the next one but not a determination of it; if the facts change, the next return is filed on the new facts.
That list is cold comfort because the burdens that stay are the corporate ones: a T2 to file, payroll accounts to run, HST to remit, an accountant to pay, while the one benefit that justified all of it, the low corporate rate on retained profit, is gone for the reassessed years. What a finding really does is convert the corporation from a tax shelter into an expensive payroll intermediary.
Your options, in the order in which they expire
You have more options than the letter suggests, and they expire in a fixed order, so the sequence matters more than the strategy. The first is to answer the proposal on the facts. Auditors change positions at the proposal stage more often than owners expect, particularly on individual years where a genuine second client existed, where the contract gave you a real substitution right, or where the auditor has mistaken the agency for the client. Documents win this step; assertions do not.
The second is a notice of objection, filed within 90 days of the date on the notice of reassessment. It moves the file from Audit to Appeals, a separate group that reviews the facts and the law fresh, and it preserves your right to go to the Tax Court if Appeals confirms; the form, the timelines and what Appeals actually reviews are set out in how to dispute a CRA reassessment. Miss the 90 days and an extension of up to a year exists on limited grounds, but do not plan on it. Interest keeps running throughout an objection, and CRA generally cannot take collection action on a corporate income tax debt of this size while the objection is outstanding, which is why many owners pay the disputed amount anyway and wait for the refund with interest if they win.
The third is the salary route, and it only works forward: salary is deductible to a PSB in the year it is paid or properly accrued, and an accrued bonus must actually be paid within 180 days after the year-end to hold its deduction in that year. For the reassessed years the window has closed; you cannot retroactively convert profit into salary. For the current year, and for the most recent year-end if it is still inside the 180-day period, you often can, and doing so removes most of that year from the dispute before it starts.
The fourth is negotiating, and it is narrower than in a commercial dispute. Appeals settles on principle, not by splitting the number, so a settlement means conceding some years or some items on the facts: a year where you genuinely had two clients survives, a year where you did not is conceded. Separately, the taxpayer relief provisions let you ask for interest to be cancelled for CRA delay, financial hardship or circumstances beyond your control, and that request does not depend on winning the objection.
The fifth option is accepting. It is the right answer when the facts are plainly employment-like, when the amount in dispute is smaller than the cost of fighting it, or when the effort is better spent restructuring next year. Accepting is not a failure of nerve; it is a decision to spend the money on the future rather than the past. This whole sequence, from the first reply to the settlement, is the work we do inside CRA Support, and the first hour is usually enough to tell you which of the five you are looking at.
Stopping next year's exposure, and the facts that change the answer
The reassessment is about the past; your leverage is entirely about the future, and two moves stop next year's exposure. The first is to change the facts where they can honestly be changed: a real second client, your own tools and insurance, a contract with a substitution right you would actually use, milestone billing in place of a daily rate. The second is to stop leaving profit in the corporation, paying it out as salary through payroll so that a repeat finding has almost nothing to tax.
The facts that decide how hard to fight the current reassessment, and how to run the next year, are a short list:
- How the profit came out: years paid out as salary cost little on reassessment; years retained or paid as dividends cost the most.
- Which years are open: three years is normal; more needs misrepresentation or a waiver, which is worth checking before conceding anything.
- Whether any year had a genuinely different fact pattern: a second concurrent client, a fixed-price project or a different contract can carve one year out of the finding.
- Where the 180-day window still sits: the most recent year-end may still be salvageable by salary.
- The size of the bill against the cost of the fight: an objection is cheap; a Tax Court appeal is not.
- What next year's engagement looks like: if nothing will change, the real question is whether the corporation should keep operating at all.
We handle these files in two tracks at once: the response and objection on the reassessed years, and a compensation reset for the current year so the exposure stops growing while the dispute runs. If you have a questionnaire, a proposal letter or a reassessment on your desk, a free 15-minute discovery call is enough for us to tell you which years are worth fighting and what to change before your next year-end.
