When starting a business in Canada, you have a variety of choices in business structure. One form of business entity is to create a corporation, and there are several options in Canada.
There are several reasons for considering a corporation as it can offer credibility and reduced liability. One of the top reasons for forming a corporation is that Canadian corporations are taxed differently than other forms of business. A corporation is a legal entity in itself and is taxed separately from the individual.
Below are the different types of corporations available in Canada and the conditions that must be met to form each type.
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:
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;
It 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, for example, the Toronto Stock Exchange (TSE).
Note that changes in share ownership can potentially cause the corporation to cease to be a CCPC. For example, if some shareholders became non-residents or shares were sold to non-residents so that non-residents controlled more than 50% of the voting rights of the shares, the corporation would no longer qualify to be a CCPC.
From a tax standpoint, there are corporate tax advantages of the Canadian-Controlled Private Corporation (CCPC). In addition to the small business tax deduction, there are enhanced investment tax credits, capital gains exemptions for shareholders on the sale of shares, and research and development tax credits for qualifying activities.
Other Private Corporation
This type of corporation also has to be a resident in Canada and be private. It must also meet all of these conditions:
It is not controlled by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
It is not controlled by one or more prescribed federal Crown corporations (as defined in Regulation 7100); and
It is not controlled by any combination of corporations described in the two previous conditions.
A public corporation is defined by having a class of shares listed on a designated Canadian stock exchange, although it may also elect to be or be designated as a public corporation under Regulation 4800(1) of the Income Tax Regulations. With that said, if a public corporation meets certain conditions under Regulation 4800(2) of the Income Tax Regulations, it can elect or be designated not to be a public corporation.
Control by a Public Corporation
This type of corporation is a Canadian subsidiary of the public corporation above. However, when filing the T2 Corporation Income Tax Return, it doesn't qualify as a public corporation.
Any corporation that doesn't fit into one of the options above is considered an "other corporation."
Choosing Your Corporation Type
While sole proprietorship and partnerships can be easier and less expensive to create, the corporation offers increased liability protection and credibility. Further, if you choose to structure your small business as a corporation in Canada, it's worth considering a Canadian-controlled private corporation because of the corporate tax advantages. With that said, the added cost and paperwork leads many businesses to wait to form a corporation until revenues reach $50,000 per year.