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CANADIAN-CONTROLLED PRIVATE CORPORATION

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Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Canadian-Controlled Private Corporations (CCPCs) are the preferred corporate structure for many small and medium-sized businesses operating within Canada due to the preferable tax treatment that they are capable of realizing under the Income Tax Act (Canada). When it properly structured and undertake their business in conformity with the applicable rules and procedures of the Income Tax Act (Canada), CCPCs are capable of realizing particular tax advantages, including:

  • Small Business Deduction (SBD):

    • Lower Federal Tax Rate: This is the most significant benefit. CCPCs are eligible for a reduced federal corporate tax rate on their first $500,000 of active business income. Instead of the general federal corporate tax rate (which is currently 15% after the federal tax abatement), eligible CCPCs pay a much lower rate, currently 9%.

    • Lower Provincial Tax Rates: All Canadian provinces and territories also offer a reduced corporate tax rate for CCPCs on income eligible for the SBD. These rates vary by province but are significantly lower than their general corporate rates (ranging from 0% to 3.2% in many provinces).

    • Combined Effect: The combination of the reduced federal and provincial rates means a CCPC can pay a significantly lower overall tax rate on its first $500,000 of active business income compared to a non-CCPC or an individual earning the same income personally. This allows the business to retain more after-tax earnings for reinvestment, growth, or paying down debt.

  • Tax Deferral (Income Splitting/Integration):

    • Retaining Earnings: Income earned by a CCPC is taxed at the lower corporate rate (via the SBD) within the corporation. If the business owner chooses to leave these profits within the corporation instead of immediately paying them out as salary or dividends, they can defer personal income tax on those earnings. This leaves more capital inside the corporation to be invested and grow, generating further income.

    • Integration Principle: Canada's tax system aims for "integration," meaning that over the long term, the total tax paid on business income should be roughly the same whether it's earned personally or through a corporation. However, the deferral achieved by keeping funds in the corporation at the lower corporate rate provides a significant cash flow advantage and time value of money benefit.

  • Lifetime Capital Gains Exemption (LCGE):

    • Tax-Free Sale of Shares: Shares of a CCPC that qualify as "qualified small business corporation shares" may be eligible for the Lifetime Capital Gains Exemption (LCGE) when sold. This allows an individual shareholder to realize a significant amount of capital gains tax-free. As of January 1, 2025, the LCGE limit is $1.25 million, indexed for inflation.

    • Canadian Entrepreneurs' Incentive: The 2024 Federal Budget introduced a new Canadian Entrepreneurs' Incentive. For qualifying individuals who own at least 5% of CCPC shares and have worked at the CCPC as their primary place of employment for at least three years, the capital gains inclusion rate is reduced from 50% to 33.3% on gains up to a lifetime maximum of $2 million (phased in from 2025 to 2029). This further enhances the tax benefits upon the sale of a qualified CCPC.

  • Scientific Research & Experimental Development (SR&ED) Tax Credits:

    • Enhanced Credits: CCPCs are eligible for enhanced refundable SR&ED tax credits. This means they can receive a higher percentage of their eligible R&D expenditures back as a tax credit (currently 35% on up to $3 million of qualifying expenditures), compared to non-CCPCs (which typically receive a 15% non-refundable credit). These refundable credits can significantly boost cash flow for innovative businesses.

  • Employee Stock Option Deferral:

    • Deferred Taxation: For employees of CCPCs, the taxable benefit arising from the exercise of stock options is deferred until the shares are actually sold. In contrast, for non-CCPCs, the benefit is generally taxable in the year the option is exercised. This deferral provides a cash flow advantage to the employee.

  • Income Sprinkling (Subject to TOSI Rules):

    • Distributing Income to Family Members: Historically, CCPCs allowed for significant tax savings through "income sprinkling" – paying dividends to family members (spouse, adult children) who are shareholders in the corporation and are in lower tax brackets. This would reduce the overall family tax burden.

    • Tax on Split Income (TOSI) Rules: While still possible, the Tax on Split Income (TOSI) rules, introduced in 2018, significantly limit the ability to income-sprinkle to adult family members unless they meet certain "reasonableness" tests (e.g., actively engaged in the business, owning a significant interest and being over 24). For minors, the "kiddie tax" still applies, taxing certain dividends at the highest marginal rate.

    • Remaining Opportunities: Despite TOSI, some opportunities for income sprinkling remain, particularly for family members who genuinely contribute to the business, are over 25 and own a significant share of the company, or who receive capital gains on qualifying small business shares.

  • Deductibility of Business Expenses:

    • Broader Deductions: Corporations can deduct a wide range of legitimate business expenses, including salaries, benefits, office expenses, marketing, professional fees, and more. These deductions reduce the corporation's taxable income.

    • Asset Ownership: The corporation can own assets used in the business, and related expenses (e.g., vehicle expenses, depreciation) can be deducted, potentially offering advantages over personal ownership in some cases.

The utilization of Canadian-Controlled Private Corporations are not without their challenges and complexities, such that it is important that the appropriate tax and legal requirements are strictly observed and implemented such that businesses might fully optimize the permissible tax advantages that are available through the Income Tax Act (Canada) and related provincial tax legislation, together with minimizing scrutiny from the Canada Revenue Agency by clearly implementing these legitimate tax processes and structures.

For advanced corporate tax planning, through the optimization of a Canadian Controlled Private Corporation, contact our law firm to schedule a confidential initial consultation with a knowledgeable corporate tax lawyer at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

 

What is a Section 85 Rollover: A section 85 rollover enables a taxpayer (the transferor) to dispose of “eligible property” to a taxable Canadian corporation (the transferee), so that most, if not all, of the tax consequences which usually arise on such a disposition are shifted to the transferee corporation from the transferor. The transferor is permitted to dispose of the property to the transferee corporation for an “agreed amount” which may be other than the fair market value of either such property or the consideration received for it. Read more . . .

 

What is a Butterfly Transaction: A Butterfly Transaction, technically known as a Divisive Reorganization, is a tax-free method of dividing up assets in a corporation into separate corporate allocations, which is commonly implemented when the shareholders are seeking to go their separate ways and thus divide out the corporation’s assets. A Butterfly Transaction can also be carried out when the corporation consists of two different businesses with a view to separating the divisions so that they are each in a separate corporation; or alternatively, to “purify” a corporation of its non-active business assets . . . Read more . . .

  

What are Capital Dividends (Tax-Free Dividends): Capital dividends are private corporation dividends that are paid tax-free to their Canadian-resident shareholders, such that no part of the dividend is included in computing the recipient shareholder’s taxable income. Read more . . .

  

Importance of Maintaining a Capital Dividend Account [for Tax-Free Dividends): A private corporation’s Capital Dividend Account is the means by which the corporation pays its resident-Canadian shareholders tax-free capital dividends. The Capital Dividend Account (CDA) does not appear on a balance sheet, although it might appear in the notes of a financial statement, where the accountants are sufficiently apprised as to the inner workings and transactions of the corporation. Read more . . .

 

What is an Eligible Dividend (Enhanced Dividend Gross Up / Tax Credit): An eligible dividend is a taxable dividend that receives an enhanced dividend gross up and an enhanced dividend tax credit and is available on dividends from either a public corporation (not entitled to the small business deduction) or a private corporation with high earnings (net income over the $500,000 small business deduction). Read more . . .

 

What is a Non-Eligible Dividend (Ordinary Dividend): A non-eligible dividend (also known as an ordinary dividend) is a taxable dividend that does not receive the benefit of the enhanced dividend gross-up and the enhanced dividend tax credit that is provided to eligible dividends. Read more . . .

 

What is a Stock Dividend: A stock dividend is a dividend paid by the issuance of shares of the capital stock of the payer corporation. The term "stock dividend" is defined as including any dividend paid by a corporation to the extent that it is paid by the issuance of shares of any class of the capital stock of the payer corporation, . . . Read more . . .

 

Understanding CCPCs

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