Small Business Corporations

A Canadian-controlled private corporation (CCPC) is a common vehicle for carrying on a small business in Canada.

A corporation offers sufficient protection against personal liability to its shareholders. Yet, the combined rate of the federal and provincial taxation (from 15.5 to about 22 percent, depending on the province) on first $500,000 of income is low enough to spur business activities and offer significant tax savings to business owners.

CCPCs are defined as private corporations that are not controlled, directly or indirectly, by one or more non-resident persons. In addition, corporations that have shares listed on a stock exchange, in or outside of Canada, do not qualify as CCPCs. Thus, although a non-resident person may have a significant investment into a CCPC, it may only lose its preferential tax status if the non-resident person gains control over the company. For example, where a non-resident holds no more than 50 percent of the CCPC voting power, it should continue to benefit from the reduced corporate tax rate.

The special small business corporation rate applies to the first $500,000 of the CCPC’s active business income. Generally, active business carried on by a corporation is any business carried on by the corporation other than a specified investment business or a personal services business. In certain circumstances, investment income may qualify as active business income. For example, rental income earned by a CCPC may qualify as active business income when it is earned from a related small business corporation.

Main Advantages

  • Small business deduction. The combined federal and provincial income tax rate on the first $500,000 of active business income ranges from 13.5 percent (in British Columbia) to 27 percent (in Nova Scotia). The small business rate in Ontario is expected to be 15.5 percent in 2011.
  • $750,000 capital gains deduction on the sale of shares of a CCPC that qualifies as a qualifying small business corporation.
  • The exemption can be used on a transfer of shares in a qualifying CCPC by an individual shareholder.
  • Private health service plans can be established to provide tax-free benefits to employees, including owner-managers.
  • Preferable Investment Tax Credit rate of 35% for Scientific Research and Development activities.

Disadvantages

  • The CCPC regime is established to promote small business. Accordingly, a small business corporation is penalized where it is used to earn and retain investment or rental income. The combined federal and provincial rate on investment income earned by CCPC can reach 48 percent.

Solution

There are multiple solutions whereby investment income may be earned and subject to favorable income tax rates within a related group of companies. For example, special holding companies may be established to separate and hold investments.

TaxChambers LLP is collaborating with Andersen Global® in Canada.