Corporate Tax Advantages - Canadian-Controlled Private Corporation
The Canadian-Controlled Private Corporation Gets the Best Corporate Tax Deal
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.