When you are filling out your T2 Corporate Income Tax form, one of the first things you have to do is tick a box which indicates what type of Canadian corporation the corporation was at the end of the tax year.
The Small Business Deduction for Canadian-Controlled Private Corporations
The biggest corporate tax advantage of being a Canadian-controlled private corporation is being eligible for the small business deduction. This corporate tax deduction is calculated by multiplying the small business deduction rate of 17%* by the least of
- a corporation's active business income (line 400 on the T2 corporate tax return)
- its taxable income (line 405)
- its business limit for the year (line 410)
- its reduced business limit for the year (line 425).
The amount of the corporation's Small Business Deduction then gets entered on line 430.
*The deduction rate is scheduled to rise again in 2018:
- 18.5% as of January 1, 2018
- 19% as of January 1, 2019
The small business deduction applies to the first $500,000 of active business income. (See the Canada Revenue Agency's IT73R6: The Small Business Deduction for more information.)
Other Tax Advantages for Canadian-Controlled Private Corporations
In addition to the small business deduction, qualifying CCPCs are entitled to:
- an additional month to pay the balance of taxes payable under Parts I, I.3, VI, and VI.1 for the year;
- enhanced investment tax credits, which may be fully refundable, for their qualified expenditures on scientific research and experimental development;
- shareholder entitlement to the capital gains exemption on the disposition of qualified small business corporation shares; and
- deferral of an employee's taxable benefit arising from the exercise of stock options granted by a CCPC (IT-458R2: Canadian-Controlled Private Corporation).
Let's look at the details of some of these corporate tax advantages:
In terms of research and development expenditures, Canadian-controlled private corporations can claim federal research and development credits at a rate of 35% (up to a maximum of $3 million) to reduce corporate taxes, a much better deal than for other types of corporations which can which claim a credit of 15%.
As for the "shareholder entitlement" referred to in the definition of a CCPC above, owners of shares in Canadian-controlled private corporations can claim a $750,000 capital gains exemption.
And, as Jack M. Mintz pointed out in "Rewarding Stagnation", (Financial Post),
"Low-taxed small business income distributed as dividends to high-income owners is typically taxed two to three and half points less than salary income. This applies to Alberta, Ontario, Nova Scotia, Prince Edward Island and Saskatchewan. (On $400,000, that translates into a tax saving of $8,000 to $14,000)."
Another way of looking at the corporate tax advantages of the Canadian-controlled private corporation is to compare net corporate tax rates. For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 11%*, while the net tax rate for other types of corporations is 15%.
*The net tax rate for CCPCs is scheduled to decrease over a four-year period starting in 2016 as follows:
- 9.5% effective January 1, 2018
- 9% effective January 1, 2019
Obviously, there are considerable corporate tax advantages to being a Canadian-controlled private corporation. So what does a Canadian corporation have to do to qualify as a CCPC?
What Is a Canadian-Controlled Private Corporation?
As the name implies, a Canadian-controlled private corporation has to be private. It also has to meet all of the following conditions (T4012: T2 Corporation Income Tax Guide):
- it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
- it is not controlled directly or indirectly by one or more non-resident persons;
- it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
- it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
- if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
- no class of its shares of capital stock is listed on a designated stock exchange.
Corporate Tax Planning Begins at Inception
If you're thinking of incorporating your business, it's worthwhile to familiarize yourself with the different types of corporations from a tax point of view and potential corporate tax issues. When tax time rolls around, the Canadian-controlled private corporation has definite advantages that you may want to take advantage of.