Canadian Controlled Private Corporation

In Canada, there are different types of corporations for tax purposes. Doing business through Canadian Controlled Private Corporation (CCPC) is preferred business structure because of various tax advantages. In this blog, we will see what CCPC is and outline the key tax benefits available to CCPC.?

What is a Canadian Controlled Private Corporation (CCPC)?

As per Canada Revenue Agency, a Canadian Controlled Private Corporation (CCPC) is:

• a privately held corporation.?
• registered (resident of) in Canada;
• not controlled directly or indirectly by one or more non-resident persons;
• not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation);
• is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada; and
• is not controlled directly or indirectly by any combination of persons described above.

The key condition for private corporation to be CCPC is to meet “control” test. The word “control” includes de jure and de facto control, the former refers to a legal control of more than 50 % of the voting rights to elect majority of the board of directors while the latter refers to a power that would lead to control if a right is exercised (such as an option to purchase balance shares, option to convert preferred shares into control shares to acquire control, etc,).

Advantages of CCPCs from a tax perspective:

1. Lower Tax Rates: First CAD 500,000 of income, known as the small business deduction (CCPC must be earning active business income), is taxed at a lower rate which reduces the overall tax burden.

Lifetime Capital Gains Exemption (LCGE): Shareholders of CCPCs can claim a LCGE exemption on the sale of qualified small business corporation shares. The LCGE limit for 2023 is CAD 971,190.

1. Income Splitting: CCPCs facilitate income splitting, enabling business owners to distribute income to family members who are shareholders or employees to reduce the overall tax burden for the family.
2. Access to Tax Credits: Eligibility for various tax credits and incentives, such as research and development tax credits, investment tax credits, and regional development programs, at the provincial and federal level.?
3. Employee Stock Options: Employees can defer tax on stock options until they dispose of them. Essentially, no tax on exercise of the option.
4. Allowable Business Investment Loss (“ABIL”): Where CCPC is essentially insolvent, not carrying on business, or is expected to close, then the taxpayer can be deemed to have suffered a loss, to the extent of unrecovered amount of investment or loan given to CCPC. In such case, on necessary elections being filed, ABIL can be claimed as a deduction against all other incomes on personal tax return.

By utilizing the tax benefits offered by CCPCs, business owner can reduce effective tax rate and optimize working capital. Please feel free to consult with our tax professional ([email protected]) at Fernandez Young, CPAs and Business Advisorsto understand the specific requirements and implications of CCPCs based on your circumstances.