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The government of Canada recognizes various types of corporations for tax purposes. All eligible corporations are expected to report their corporate business income at the end of their fiscal year. As a corporation, it is essential to determine which category accurately describes you at the end of the year, since some corporations may qualify for tax deductions. The sections below explore everything you should know about Canada-controlled private corporations (CCPCs), including how they affect your taxes and businesses that can qualify and how to get the designation.
What is a CCPC?
There are five different categories of corporations recognized by the CRA, and a CCPC is one of them. Each corporation has a set of requirements it must meet to get the designation. A Canada-controlled private corporation is simply a type of private corporation controlled by residents of Canada. If it is controlled by non-residents or a public corporation, or a combination of the two, it ceases to be a CCPC.
Many businesses aim to be designated as a Canada-controlled private corporation because of its advantages when it comes to tax reliefs. CCPCs tend to pay lower taxes on net income while being favored for tax credits. These tax advantages are meant to encourage Canadian residents to create businesses and corporations.Easy, fast, and even fun. Wealthsimple Tax is CRA-certified tax software that you’ll actually want to use. And you only pay what you want, no catch — get started.
CCPC and Taxes
Describing your corporation as a CCPC comes with various advantages, including qualifying for tax deductions awarded on active business income. The small business deduction, for example, offers a federal deduction on the first $500,000 in business income. There's also a small business dividend tax credit reserved for dividends from CCPCs. As a corporation, the CRA expects you to complete form T2 for Corporate Income Tax at the end of each fiscal year. When filling this form, the first requirement is to declare your corporation, including a designated box CCPCs can check.
Corporate tax deductions are calculated by multiplying the deduction rate by amounts in line 400 (corporation's active business income), line 405 (taxable income), line 410 (business limit for the tax year) and line 425 (reduced business limit for the tax year). The least amount of these calculations is then entered in line 430 of the T2 slip. Other advantages CCPCs have concerning taxes include:
There's an additional month to pay tax balances under Parts VI.1, VI, I.5 and I.
Better investment tax credits, including refundable amounts for qualified expenses incurred on experimental development and scientific research.
Shareholder capital gains exemption entitlement following the disposition of qualified business corporation shares.
You can defer employee taxable benefits from exercising CCPC granted stock options.
There are other minor advantages CCPCs have, but it is areas like tax credits given to scientific research that hold much value. CCPCs can get refundable tax credits of 35% up to $3 million, while other corporations can only claim 15%. You can also claim up to $750,000 in shareholder entitlement. In other comparisons, CCPCs have seen their net tax rate drop from 11% to 9%, while other corporations are taxed at 15%.
What Businesses Qualify?
Several businesses can qualify as a Canada-controlled private corporation. However, it is crucial to understand the qualifications and implications in the early stages of incorporation. While CCPCs have better tax reliefs, you will have to meet all the requirements during the tax year. The CRA recognizes a CCPC if it meets the following requirements:
It is registered as a private corporation.
Resident or incorporated in Canada, or a resident in Canada, beginning on June 18, 1971, up until the tax year.
The CRA will not recognize your corporation as a CCPC if:
It is under the direct or indirect control of a non-resident or multiple non-residents of Canada.
It is controlled directly or indirectly by a public corporation, except for venture capital corporations described in Income Tax Regulation 6700.
It is under the control of a Canadian resident corporation with shares listed on a stock exchange outside Canada.
It is under the direct or indirect control of any combination of persons meeting the first three conditions
A class or classes of its capital stock shares appear on designated stock exchanges.
The biggest advantage of being a CCPC is the small business deductions offered on active corporate business income. The CCPC may also be a small business corporation (SBC) and qualify for capital gain exemptions (CGE). However, to be considered a qualified small business corporation, the CCPC must meet specific requirements.
How to get a CCPC designation
There's no path to CCPC designation unless you meet all the qualifications and requirements in the income tax regulations. Various subsections define what constitutes a Canada-controlled private corporation. Reading and understanding these subsections is crucial when incorporating your business. It is also possible to not be designated a CCPC in a given tax year. You can do this under subsection 89(11) by ticking box 1 of line 040, making it easier to have the corporation controlled by non-residents or public corporations. However, you won't claim the tax deductions and credits awarded to CCPC for years you elect yourself not to be designated as one.Wealthsimple Tax is a simple way to file your taxes. File your return with confidence it’s done right, and pay what you want—there’s no catch.
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