Canadian Controlled Private Corporations (CCPCs) Have Many Special Tax Benefits
Many corporations in Canada are Canadian Controlled Private Corporations (CCPCs) and the status gives them special tax benefits such as small business deduction, enhanced investment tax credits for expenditures on scientific and experimental research, e lifetime capital gain exemptions and employee stock option benefits. To qualify as a CCPC, a corporation must meet certain tests and conditions.
How to Qualify for CCPC status?
Under s.125(7) of the Income Tax Act, a corporation must meet the following criteria to qualify as a CCPC:
- Be a private corporation, which means its shares cannot be traded on a stock exchange;
- Be a Canadian corporation, which means it is either incorporated in Canada or a resident in Canada;
- Not controlled directly or indirectly by one or more non-residents of Canada or one or more public corporations, or a combination of both.
The word "control" includes de jure and de facto control, the former refers to a legal control of more than 50 percent of the voting rights to elect a majority of the board of directors while the latter refers to a power that would lead to control if exercised (such as an option to purchase shares).
Tax advantages of a CCPC
Small Business Deduction
A CCPC has many corporate tax benefits and the biggest one is small business deduction that reduces Part I tax the corporation would otherwise have to pay. Although the general corporate tax rate is 28% after federal abatement, a CCPC only pays a reduced tax rate of 9%. However, the reduced rate only applies to the first $500, 000 of active business income.
Refundable Investment Tax Credits under the Scientific Research & Experimental Development (SR&ED) Program
To promote technology advancement in Canada, the federal government allows CCPCs to earn
- Refundable Investment Tax Credits of 35% on qualifying expenditures up to a maximum limit of $3 million under the SR&ED program;
- ITCs of 15% on any amount in excess of the $3 million expenditure limit.
- For CCPCs that are "qualifying corporations", 40% of the 15% ITCs are refundable and the non-refundable portion can be carried forward 20 years;
- For CCPCs that are not "qualifying corporations, the whole 15% is non-refundable and it can still be carried forward 20 years.
The term "qualifying corporation" means a CCPC whose taxable income from the previous year does not exceed the qualifying income limit (QIL) determined by a certain formula. If a corporation has taxable capital of up to $10 million, the QIL is $500,000 and it's reduced to nil when the corporation's taxable capital reaches $50 million.
Lifetime Capital Gain Exemption
When the shareholder of a CCPC realizes a capital gain by disposing of qualifying small business corporation shares (QSBC) and the sale exceeds both the purchase price and reasonable share disposition price, the first $866,000 (the amount increases annually) will not be subject to tax. In order to meet the tests for a qualified small business corporation, the corporation must first qualify as a CCPC. In order to claim the lifetime capital gains exemption the shares must have been held for 24 months or more.
Individuals, not professional investment corporations, can also defer their capital gains realized from the sale of shares by reinvesting the proceeds into another qualifying small business. The caveat is that the individual must reinvest either in the year of disposition or within 120 days after the end of the fiscal year.
Employee Stock Option Benefits
When non-CCPC employees exercises his or her stock option, they have incurred a taxable benefit and must include that in their taxable income. For CCPC employees, on the other hand, they only need to pay tax when they dispose of their shares for a gain, which in turn allows them to defer tax until the disposition of their shares.
Allowable Business Investment Loss (ABIL)
An ABIL is half of business investment loss (BIL) and it can be used to reduce all sources of income for the year. The excessive amount can be carried back three years or forward ten years. An BIL can be incurred when there is a capital loss from an actual disposition to an arm's length person of a debt in a CCPC that is:
- A small business corporation,
- Bankrupt and that was a small business corporation at the time it became a bankrupt, or
- A corporation that was insolvent and a small business corporation at the time a winding-up order was made in respect of the corporation
Pro tax tips - you should know the benefits of CCPC at incorporation
CCPC has considerable corporate tax advantages and you should familiarize yourself with these benefits if you are considering incorporating a business. If you need tax planning advice and are thinking of incorporation, contact our office to speak to an experienced Canadian tax lawyer for guidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.