Bookkeeping for Canadian Consultants & Professional Services
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Table of Contents
The One-Client Problem
Incorporating is normal for consultants, and for a substantial minority it creates an exposure most never hear about until an assessment arrives.
The personal services business rules apply where an individual provides services through a corporation and would reasonably be regarded as an employee of the client but for that corporation — where the worker is a specified shareholder and the company doesn’t employ more than five full-time employees.
Where they apply, the corporation loses the small business deduction and the general rate reduction — leaving it at the unreduced 28% federal rate — then pays an additional 5% federal tax on top, for 33% federally before provincial tax, and is denied deductions for almost everything except salary and benefits paid to the incorporated employee. Rent, equipment, software, professional fees, home office — all denied. Assessments typically cover every open year.
Consultants placed through agencies at a single client site, IT contractors on long engagements, and interim executives are the profiles most exposed. The corporate tax mechanics are covered in our T2 corporate tax guide.
Key Takeaways
- A corporation with one client and one worker is the classic personal services business profile — the most punitive classification in Canadian corporate tax.
- Revenue belongs in the period it is earned, not invoiced or collected. Project work spanning a year end needs deliberate treatment.
- A retainer is a liability until the work is done.
- Rebilled disbursements are revenue and expense, not a netting exercise — and they usually carry GST/HST.
- Utilisation and realisation matter more than revenue in a service business.
Reducing PSB Risk
There is no single fix, because the test looks at the whole relationship. But the factors that count are known, and several are within your control.
- Multiple clients. The most effective single factor. Even a second meaningful client changes the picture materially.
- Your own tools and workspace. Working from your own premises with your own equipment, at least part of the time, weighs in your favour.
- Control over how and when. Deliverable-based engagements beat hourly arrangements with set hours.
- Financial risk. Fixed-price work where you absorb overruns, and the ability to profit from efficiency, are genuine indicators of business.
- Right of substitution. A contract permitting you to send a qualified replacement — and the practical ability to do so — is strong evidence.
- Your own insurance, marketing and business presence. Professional liability coverage, a website, business cards, active client development.
Contract language alone will not save an arrangement whose substance is employment — the CRA’s employee-or-self-employed tests look at the whole relationship, just as they do for employee-versus-contractor decisions in payroll. It also isn’t irrelevant — a contract that reflects a genuinely independent arrangement supports the position. If your corporation has had one client for several years, get the arrangement reviewed properly.
Recognising Revenue
Revenue is recognised when earned, which for services means as the work is performed. Three situations need care.
Work in progress at year end. Time spent and costs incurred on unbilled work represent revenue earned in the current year. Ignoring it understates income now and overstates it next year. Certain professions have had specific rules and transitional treatment for WIP; confirm the current position for your profession rather than applying a general rule.
Milestone projects. A fixed-fee engagement billed on milestones may have work performed well ahead of, or behind, the billing schedule. Where the amounts are material, recognise proportionate to work completed.
Multi-year contracts. A two-year retainer paid annually in advance is not two years of revenue this year.
For most small consultancies the difference between invoice-date recognition and properly earned revenue is immaterial and the simpler approach is fine. Once projects routinely span a year end, it stops being immaterial.
Retainers and Deposits
A retainer received before work is performed is deferred revenue — a liability — until you’ve earned it. The balance sheet mechanics are in small business accounting basics. Booking it as revenue on receipt inflates the current period and leaves the following one showing costs against nothing.
It matters more than it sounds. A consultancy collecting several large retainers in December looks highly profitable in a year it wasn’t, pays tax accordingly, and then delivers the work in a year with poor reported margins.
Where a retainer is genuinely refundable and held on account, the liability treatment is clear. Where it’s a non-refundable commitment fee, the analysis differs. Track the balance explicitly in either case.
Expenses and Disbursements
Consultants routinely incur costs on a client’s behalf — travel, subcontracted specialists, software licences, printing — and rebill them.
The correct treatment in most cases is gross: record the cost as an expense and the rebill as revenue. Netting them hides real activity, understates revenue in a way that can affect GST/HST registration timing, and makes margin analysis meaningless.
Rebilled disbursements generally carry GST/HST at your applicable rate, even where the original cost didn’t. An expense you incurred as principal and rebilled is part of your consideration for the service, not a pass-through, and the distinction between acting as principal and acting as agent determines the treatment. Getting this wrong systematically is a common finding on review.
Travel to a client site is business travel. Meals with clients remain 50% deductible. A home office used as the principal place of business follows the standard business-use-of-home rules.
What to Track
Service businesses have no inventory and few assets, so the meaningful numbers are about time and pricing.
- Utilisation — billable hours as a share of available hours. Anything much above 70% for an owner-operator usually means business development has stopped.
- Realisation — amount billed as a share of standard value of time spent. Persistent write-downs point to scoping or pricing problems, not effort problems.
- Effective hourly rate — revenue by engagement divided by all hours spent including unbilled. Frequently reveals that the prestigious client is the least profitable one.
- Revenue concentration — share from your largest client. Above 50% is a business risk; above 80% is also a PSB risk.
- Days to collect — from invoice to payment.
Concentration is worth watching for both reasons at once, which makes it the single most useful number on this list.
Working With Clients Outside Canada
Consultants reach international clients more easily than almost any other small business, and the tax treatment differs from domestic work in ways worth understanding before the first invoice.
GST/HST. Services supplied to a non-resident who is not registered in Canada are, in many cases, zero-rated — you charge nothing but continue to claim input tax credits on your costs. The rules are more specific than that summary suggests, with exceptions turning on where the service is performed, whether it relates to Canadian real property or goods, and whether the non-resident is in Canada when the service is supplied. Advisory work delivered remotely to a foreign company usually qualifies; a service connected to something physically in Canada often does not.
Two practical consequences follow. Foreign revenue still counts toward the $30,000 registration threshold, because zero-rated supplies are taxable supplies at 0%. And a consultant with mostly foreign clients is typically in a refund position, which makes registration worthwhile even below the threshold and argues for filing more frequently than annually.
Withholding tax. Some countries require a payer to withhold tax on payments to foreign service providers. Where that happens, you receive less than you invoiced and may be able to claim a foreign tax credit against Canadian tax on the same income. Keep the withholding documentation — without it the credit is difficult to support. The relevant tax treaty often reduces or eliminates the withholding, but usually only if you provide the payer with the right residency certification before payment — for US clients, usually Form W-8BEN-E.
Currency. Invoice in a foreign currency and you carry exchange risk between invoice and payment. Record the receivable at the Bank of Canada rate on the invoice date and the difference on settlement as a foreign exchange gain or loss. Over a year of US-dollar invoicing this is a real number, and it belongs in your books rather than being quietly absorbed into revenue.
Contracts worth having
A written engagement letter is worth more to a consultant than to almost any other small business, because the deliverable is intangible and disputes are therefore about memory. Define the scope, what is explicitly out of scope, the fee basis, what triggers additional fees, payment terms and interest on late payment, ownership of intellectual property, and how either party ends the engagement.
The scope and change-fee clauses do most of the work. Scope creep is the largest single cause of poor realisation in professional services, and it is far easier to raise a change fee against a written scope than to argue about what was originally agreed.
One Client and an Incorporated Business?
Our corporate tax team will review the arrangement against the PSB tests and tell you plainly where you stand — before the CRA does.
