Earlier this week, I received the following question from a client:
“One of my colleagues who is finishing residency is deciding between incorporation or not. He sent me the concern about CRA viewing physicians paying themselves through a corporation being deemed as a personal service business. Is there any concern about that changing in the future?”
It’s a thoughtful question, and one that occasionally surfaces among residents and early-career physicians.
A Brief History: Why the PSB Rules Exist
The Personal Services Business (PSB) rules were introduced into the Income Tax Act in the early 1980s in response to what became a growing practice among large employers, beginning most notably with IBM Canada. IBM encouraged some staff to resign as employees and return the next day as incorporated contractors. This shift allowed IBM to avoid paying the employer share of Canada Pension Plan (CPP) and Employment Insurance (EI) premiums, and allowed the individual to take advantage of small business tax rates and broader deductions — while continuing in what was essentially the same job.
Other employers began to adopt the same model, seeing it as a novel workaround. The Canada Revenue Agency (CRA) and Department of Finance viewed this as an erosion of the employee/employer framework and a misuse of the small business deduction. As a result, legislation was introduced to prevent these “incorporated employee” arrangements from benefiting from favourable tax treatment.
The PSB rules remain in place today — not to penalize professionals running legitimate businesses, but to deny the small business deduction where a corporation is simply a conduit for employment income.
What Triggers PSB Classification?
The CRA considers a corporation to be a PSB if all of the following apply:
- The individual performing the services (e.g. the physician) would reasonably be considered an employee of the client if the corporation didn’t exist;
- The corporation has five or fewer full-time employees throughout the year;
- The services are provided to a single client or a related group of clients;
- The income is not earned through a corporation that is itself carrying on a business.
(Source: CRA – Personal Services Business)
So — Should Physicians Be Concerned?
Generally speaking, no. Most physicians would not be considered employees of the clinics, hospitals, or facilities where they work. They maintain clinical autonomy, often bill their provincial health insurance plan directly (e.g. the Medical Services Plan (MSP) in British Columbia, the Ontario Health Insurance Plan (OHIP) in Ontario, or the Régie de l’assurance maladie du Québec (RAMQ) in Quebec), and assume financial risk through overhead arrangements or by operating their own practice.
Incorporated physicians typically fall into one or more of the following categories:
- Working as an associate in a clinic — billing the province directly and paying overhead to the clinic, while maintaining control over their schedule and patient care decisions.
- Accepting short-term locum contracts — providing services at multiple locations without being integrated into the long-term structure of any one organization.
- Operating their own medical practice — fully managing clinic operations, assuming business risk, and billing the province directly for services provided.
In all of these situations, the PSB rules are unlikely to apply, provided the arrangements reflect genuine self-employment and are not structured, in substance, as employment.
That said, there can be edge cases. If a physician were working long-term for a single payer, with no business risk, little to no autonomy, and under highly restrictive terms, the CRA could take a closer look. These scenarios are rare, but possible — and worth identifying early.
My Experience in Practice
Since 2012, my firm has focused our time and resources almost exclusively on physicians across the country. We’ve supported clients through countless CRA inquiries, reviews and audits. To date, I’ve never had a physician client challenged on the basis of their corporation being a PSB. That’s not to say it couldn’t happen, but when structured and operated properly, the risk is remote.
Could the Rules Change?
At the time of publication, there’s no indication from the CRA or the Department of Finance that the PSB framework is being revisited as it relates to physicians. The rules have remained stable, and there’s no suggestion of expanding them to capture professionals who are, in fact, operating businesses.
Final Thoughts
This post is intended to provide general information and is not a substitute for personalized advice. Whether incorporation makes sense — and whether there’s any exposure under the PSB rules — depends on the specifics of how a medical practice is structured and operated. That said, for most physicians practicing independently across Canada, incorporation remains a widely accepted and effective structure with little to no risk of being classified as a Personal Services Business.
If you’re a physician considering incorporation or have questions about how these rules might apply to your situation, feel free to reach out. I’d be happy to discuss further.
About the Author
Jonathan Tucker, CPA, CA is the founder of a boutique accounting practice that serves physicians across Canada at every stage of their career — from residency through to retirement. Since 2012, he has advised hundreds of doctors on incorporation, tax planning, and CRA compliance, with a focus on clear, practical strategies tailored to the realities of medical practice. Jonathan leads a team of professionals with expertise in U.S. and cross-border tax, GST/HST, business valuation, actuarial consulting, and more — enabling the firm to help clients navigate complex, multi-dimensional challenges with thoughtful, well-integrated solutions.
