Personal services income (PSI) is income produced mainly from an individual’s personal skills or efforts. Basically it’s income that has the characteristics of employment income.
If income is deemed to be PSI then the only deductions allowed against that income are expenses an employee would be entitled to deduct. In addition, even if the PSI income is generated through an entity (company or trust) it will still be PSI income of the individual generating the income and they will be taxed on that income in their personal tax return.
If it’s possible to change PSI into business income, the taxpayer gains the following benefits:
- Entitled to deduct a larger range of business expenses from the income.
- Can operate through a company structure and retain the profits in the company.
- Can operate through a trust structure and distribute income to family members.
Income will not be classified as PSI where:
- Less than 50% of the contract price received relates to the individual’s labour, skills or expertise. For example, a fence installer where the fence materials are greater than 50% of the contract price.
- Where employees generate more than 50% of the firms total income.
- Where more than 50% of the income is generated by equipment and assets, e.g. trucks, bobcats, etc.