As a tax lawyer, I understand the stress and uncertainty that comes with receiving a notice of an audit, especially when it pertains to being classified as a personal services business. Being audited for this classification can be daunting, but it’s crucial to remember that you have rights and options. In this blog post, I’ll dive into what being classified as a personal services business entails, the implications of such classification, and most importantly, how seeking legal representation can make all the difference in navigating through this challenging situation.
Understanding Personal Services Business Classification
First and foremost, it’s essential to grasp what it means to be classified as a personal services business. In tax law, this classification typically applies to businesses where the income generated is primarily attributed to the skills or expertise of one individual. This one individual is essentially an incorporated employee. What that means is that the Canada Revenue Agency (CRA) believes that the individual would be an employee of the company services are being provided for if the individual had not incorporated.
Implications of Being Audited
When CRA or any tax authority audits a personal services business, they are scrutinizing whether the business truly operates independently or if it’s merely a means for an individual to receive personal income while benefiting from tax advantages associated with being incorporated. If CRA determines that a personal services business is, in fact, a disguised employment arrangement, it can have significant repercussions for the taxpayer.
These repercussions may include:
1. Recharacterization of Income: The CRA may reclassify income as employment income rather than business income, which can result in higher taxes owed by the individual
2. Denial of Business Deductions: Expenses typically deductible for businesses may be disallowed if the CRA deems the business to be a personal services business. This can lead to increased taxable income and additional taxes owed
3. Penalties and Interest: If the CRA finds discrepancies or inaccuracies during the audit process, they may impose penalties and interest on any taxes owed, further exacerbating the financial burden on the taxpayer.
How a Tax Lawyer Can Help
Navigating an audit for a personal services business requires specialized knowledge of tax law and a strategic approach to defense. Here’s how a tax lawyer can assist you:
- Expert Guidance: A tax lawyer can provide personalized advice tailored to your specific situation, helping you understand your rights and obligations under the law.
- Representation: Your lawyer can act as your advocate during communications with CRA, ensuring that your interests are protected and advocating on your behalf to reach a favorable resolution.
- Negotiation and Settlement: In many cases, audits can be resolved through negotiation or settlement with the CRA. Your lawyer can leverage their negotiation skills and expertise to secure the best possible outcome for you.
- Litigation Support: If the audit results in disputes that escalate to litigation, having a tax lawyer by your side who is experienced in tax litigation can be invaluable in presenting your case effectively before the courts.
- Compliance Measures: Beyond addressing the immediate audit concerns, a tax lawyer can also provide guidance on compliance measures to help you avoid similar issues in the future, ensuring that your business remains in good standing with tax authorities.
Conclusion
Facing an audit as a personal services business can be a daunting experience, but you don’t have to navigate it alone. By enlisting the help of a knowledgeable and experienced tax lawyer, you can gain peace of mind knowing that your interests are being represented by a skilled advocate. Don’t wait until it’s too late – reach out to a tax lawyer today to protect your rights and ensure the best possible outcome for your case.
If you need any assistance, call us today. We’re here to help!
SpenceDrake Tax Law – Tax Lawyers
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.