Many corporations in Canada are Canadian-Controlled Private Corporations (“CCPCs”). Having this status entitles them to special tax benefits, which makes the decision to incorporate one’s business even more enticing. So, what is a CCPC, and does your corporation qualify for the associated tax benefits?
What is a CCPC?
The Income Tax Act defines what a CCPC is for tax purposes. The full, verbose definition is set out in s. 125(7) of the Income Tax Act. In simpler terms, a Canadian-controlled Private Corporation in a given tax year is any Canadian corporation that meets all of the following requirements:
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(i) it is a private corporation
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(ii) 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
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(iii) it is not controlled directly or indirectly by one or more non-resident persons
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(iv) it is not controlled directly or indirectly by one or more public corporations
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(v) it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada
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(vi) it is not controlled directly or indirectly by any combination of persons described in (iii), (iv) or (v)
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(vii) if all of its shares (that are owned by a non-resident person, by a public 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
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(viii) no class of its shares of capital stock is listed on a designated stock exchange.
To even further simplify this definition, essentially, if your business is a private corporation in Canada, controlled by residents or other private corporations, you will qualify as a CCPC. The definition above allows for most small, private businesses in Canada to incorporate as CCPCs, and take advantage of the tax benefits associated with them.
Tax Advantages afforded to CCPCs
There are many tax advantages given to CCPCs. The main tax advantage is the small business deduction in s. 125(1) of the Income Tax Act. If your corporation qualifies as a CCPC, s. 125(1)reduces the amount of tax your corporation is required to pay by giving it a deduction. Currently, the Small Business Deduction rate is 17%. When preparing its corporate income tax form, a Canadian-controlled private corporation claiming the Small Business Deduction would calculate its allowable Small Business Deduction by multiplying the Small Business Deduction rate by the least of (1) the income from active business carried on in Canada; (2) the taxable income; or, (3) the business limit. s. 125(2) defines the “business limit” as $500,000. As a result, unlike in a sole proprietorship or partnership, a corporation gets a significant monetary advantage on up to the first $500,000 in income it earns.
There are also many other tax advantages given to CCPCs, including:
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An additional month to pay the balance of taxes payable under Parts I, I.3, VI and VI.1 for the yea.r
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Enhanced investment tax credits for qualified expenditures on scientific research and experimental development. These tax credits may be fully refundable. CCPCs can claim federal research and development credits at much higher rates than other types of corporations are allowed to, in order to reduce corporate taxes.
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Shareholder entitlement to the capital gains exemption on the disposition of qualified small business corporation shares.
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Deferral of an employee's taxable benefit arising from the exercise of stock options granted by a CCPC.
These advantages can significantly help lessen your corporate taxes.
Find Out If You Qualify as a CCPC
Do you qualify as a CCPC? How can your corporation take advantage of the aforementioned tax benefits? The tax accounting professionals at Tax Doctors Canada can help determine what benefits your corporation qualifies for, and ensure that it pays the least amount of tax possible.
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