The Tax Benefits of a Canadian Controlled Private Corporation
There are many tax incentives available to a taxpayer that is a Canadian-controlled private corporation (“CCPC“), including the small business deduction (“SBD“), which reduces the tax rate on a corporation’s first $500,000 of active business income. To take advantage of these tax benefits, your corporation needs to create, maintain, or retain CCPC status.
The Income Tax Act (“ITA“) defines a Canadian-controlled private corporation as a private corporation that is Canadian and not controlled by non-residents or public corporations. If we were to breakdown the definition, three crucial components make up a CCPC:
- The corporation needs to be private, meaning that none of its shares are listed on a designated stock exchange within or outside Canada;
- The corporation needs to be a Canadian corporation, meaning that it was incorporated in Canada and is deemed a resident of Canada; and
- The corporation cannot be controlled by non-residents or public corporations, meaning that non-residents or public corporations cannot directly or indirectly control the company or own more than 50% of its voting power.
As long as your corporation fits within this definition, it will maintain its CCPC status and continue to reap the tax benefits available to it.
Small Business Deduction – how can a business qualify for it?
The ITA sets out the basic federal corporate tax rate in Canada. Currently, the corporate rate is 38% of the corporation’s taxable income. Additionally, federal tax abatement is applied, which reduces the rate to 28%. However, there are more favourable tax rates for certain corporations and types of income.
The ITA provides a small business deduction for Canadian-controlled private corporations. For CCPC’s claiming the SBD, the federal net tax is 9% on the corporation’s active business income up to $500,000. Canadian provinces and territories also offer a small business deduction. For instance, the Ontario general corporate income tax rate is currently 11.5%. The Ontario small business deduction reduces the corporate income-tax rate to 3.2 percent on a Canadian-controlled private corporation’s active business income.
The SBD works more as a tax credit than a deduction. The corporation’s income is reduced by claiming a deduction, and credit is claimed against tax payable to reduce tax liability. A qualifying corporation is entitled to the full small business deduction until its taxable capital employed in Canada exceeds $10 million. At this point, the corporation’s SBD is reduced on a straight-line basis. Once the corporation’s taxable capital reaches $15 million, the CCPC no longer qualifies for the SBD. Associated corporations must share the small business deduction.
To qualify for the small business deduction, a corporation must be a Canadian-controlled private corporation earning active business income.
Active Business Income
The SBD does not apply to all income but only active business income. The ITA defines active business income as income from any business carried on by the corporation other than a specified investment business or personal services business and includes an adventure or concern in the nature of trade. In other words, the ITA presumes that a corporation earns active business income unless it carries on either a specified investment business or a personal service business.
If you are thinking about starting a business, give R&A Tax Law a call today! We have the corporate, and tax experience necessary to ensure you choose the best business structure that suits your individual needs. We can even assist you with a tax plan to minimize your taxes moving forward!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.