Different Types of Corporations in Canada
Different Types of Corporation Have Different Corporate Tax Rates
Canadian corporations are taxed differently than other forms of business. The most obvious tax change is that a corporation is a legal entity in itself and is taxed separately from the individual. (That's why, as a business owner, you must file both T1 (personal) and T2 (corporate) income tax forms.) But tax-wise, there are also different types of corporations, and the type of corporation determines whether or not the corporation is entitled to certain rates and deductions.
Different Types of Corporations in Canada
When you're creating a corporation in Canada, you want to form the type of corporation that's most advantageous to you tax-wise if you can. 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 (CCPC)
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, 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, the CCPC is the most advantageous form of small business ownership. 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. See: Corporate Tax Advantages of the Canadian-Controlled Private Corporation.
Other private corporation
This type of corporation also has to be resident in Canada and 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 basically 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).
Corporation controlled by a public corporation
This type of corporation is a Canadian subsidiary of the public corporation above.
As you guessed, the type of corporation that doesn't fit into any of the other categories.
Some Types of Corporations Are Better Than Others
The corporation is the most popular form of business structure in Canada, which isn't surprising when you consider the increased liability protection a corporation provides over a sole proprietorship.
But all Canadian corporations are not created equal when it comes to taxation. When you choose to structure your small business as a corporation in Canada, it's worth seeing if you can set it up as a Canadian-controlled private corporation because of the corporate tax advantages the Canadian-controlled private corporation enjoys.