If you plan on starting a Canadian business, you can choose from many different kinds of corporation structures. For tax purposes, the corporation type determines whether or not the corporation is entitled to certain rates and deductions at the end of the tax year. One of the most popular and tax-efficient corporations is the Canadian Controlled Private Corporations (CCPCs). In the section below, we will discuss the many tax benefits available to CCPC’s due to their status.
Canadian Controlled Private Corporation is defined under the Income Tax Act as a private corporation that is Canadian and not controlled by non-residents or public corporations. To qualify as a CCPC, a corporation must meet the following criteria:
As long as your corporation fits within this definition, it will maintain its CCPC status and continue to reap the tax benefits listed below.
The Canadian government wants to incentivize Canadian residents to start local businesses in Canada. One of the ways it does this is by offering several tax incentives for Canadian Controlled Private Corporations such as small business deduction, lifetime capital gain exemptions, enhanced investment tax credits for expenditures on scientific and experimental research, and employee stock option benefits. Simply put, Canadian Controlled Private Corporations are eligible for more tax credits and typically pay lower taxes on their taxable income than other corporations.
Please note that to take advantage of these benefits, the corporation needs to ensure that they maintain or retain their CCPC status as set out above. A change of corporation type may result in significant tax consequences.
The most advantageous benefit of having CCPC status is access to the small business deduction (“SBD”) that significantly reduces the corporate tax the corporation would otherwise pay on their active business income up to $500,000. For example, on the first $500,000 of active business income of a CCPC claiming the SBD, the federal tax rate is 9% while Ontario is 3.2%, making the total CCPC tax rate to be 11.2%. In contrast, for a corporation that is not a CCPC, the federal tax rate is 15% while Ontario is 11.5%, thereby making the total tax rate to be 26.5%.
To promote technology advancement in Canada, the government of Canada has an SR&ED program that allows corporations to claim investment tax credits on certain qualifying expenses up to a certain specified limit. However, for certain corporations, the investment tax credits are fully refundable; for others, the non-refundable portion is carried forward for a specified number of years.
In the case of a Canadian Controlled Private Corporation, the federal government has a very generous program that allows CCPCs to earn refundable investment tax credits at an enhanced rate of 35% on qualifying expenditures up to a maximum limit of $3 million (i.e. up to $1,050,000 of the refundable tax credit). Over the $3 million SR&ED expenditure threshold, the credit rate is reduced to 15% for CCPCs, of which 40% may be refundable while the non-refundable portion can be carried forward 20 years. In contrast, a non-CCPC is eligible for a non-refundable federal credit at a rate of 15%.
Another significant tax benefit of a CCPC is the lifetime capital gains exemption (“LCGE”) available to CCPC shareholders. LCGE provides Canadian resident individuals with a considerable tax benefit when disposing of qualified small business corporation shares (“QSBCS”).
To meet the definition of a qualified small business corporation, the corporation must first qualify as a Canadian Controlled Private Corporation. In addition, the shares must be held for 24 months or more. Upon disposal, 50% of the LCGE is netted against the taxable capital gain, eliminating some or all of the taxable capital gain. For 2023, the lifetime capital gains exemption limit is $971, 190. This means that a CCPC shareholder that meets all the conditions of QSBC shares can shelter their taxable gain up to the LCGE limit. Please note that the LCGE limit is indexed to inflation every year.
Employee stock options are another area where a CCPC status benefits tax treatment. Generally, when an employee stock option is issued, there are no tax implications for either the employer or employee. However, a tax benefit arises under the Income Tax Act when the employee exercises the stock option.
Upon exercising the stock option, a non-CCPC employee will have incurred a taxable benefit and must include that in their taxable income. The amount of the benefit to be included is equal to the fair market value of the shares purchased minus the amount paid by the employee to the corporation for the shares, and minus the amount (if any) paid by the employee to acquire the stock options.
Conversely, a CCPC employee does not have to include a benefit amount in their income when exercising their stock option. Instead, they only need to pay tax when they dispose of their shares for a gain, allowing them to defer tax until the disposition of their shares.
Most other corporations make monthly tax installments and pay their remaining balances within two months after year-end. But Canadian Controlled Private Corporations are eligible for quarterly installments and an extra month at year-end. To qualify, they need to be a CCPC for the entire tax year, claim the full small business deduction, and have a perfect tax payment record for the year.
If you are planning to incorporate a company in Ontario or Canada, a Canadian Controlled Private Corporation could be the right choice. Even though it offers significant tax advantages, it’s advisable to review its nature and scope before making a choice. If you are looking for a tax accountant who can provide professional guidance on what structure is the right one for you, please contact us.
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