Canadian-Controlled Private Corporation: Qualifications and Tax Incentives

What are the criteria for a corporation to qualify as a Canadian-controlled Private Corporation to receive the special incentives of this status?
February 2022 | Dani Dufresne
 
Canadian-controlled Private Corporation (“CCPC”):
A Canadian-controlled private corporation is defined in section 125(7) of the Income Tax Act[1] as a private corporation resident in Canada other than a corporation that is:

• Controlled, directly or indirectly in any way, by one or more non-resident persons, by:
  • one or more public corporations (other than a prescribed venture capital corporation);
  • one or more corporations described in the last bullet point below; or
  • any combination of the foregoing.
• That would, hypothetically, be controlled by one person if that one person owned all the shares of any corporation that are owned by:
  • any non-resident person;
  • any public corporation (other than a prescribed venture capital corporation); or
  • a corporation described in the last bullet point below.
• That has a class of its shares listed on a designated stock exchange within or outside of Canada.
  • A “designated stock exchange” is defined in section 248(1) of the Act to mean a stock exchange, or that part of a stock exchange, for which a designation by the Minister of Finance under section 262 of the Act is in effect.[2] An updated list of designated stock exchanges is provided on the website of the Department of Finance.

“125 (7) Canadian-controlled private corporation means a private corporation that is a Canadian corporation other than
(a) a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph (c), or by any combination of them,
(b) a corporation that would, if each share of the capital stock of a corporation that is owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph (c) were owned by a particular person, be controlled by the particular person,
(c) a corporation a class of the shares of the capital stock of which is listed on a designated stock exchange, or
(d) in applying subsection (1), paragraphs 87(2)(vv) and (ww) (including, for greater certainty, in applying those paragraphs as provided under paragraph 88(1)(e.2)), the definitions excessive eligible dividend designation, general rate income pool and low rate income pool in subsection 89(1) and subsections 89(4) to (6), (8) to (10) and 249(3.1), a corporation that has made an election under subsection 89(11) and that has not revoked the election under subsection 89(12);
 
… “
 
CCPC Status Prerequisite for Incentives under Income Tax Act (Federal Laws):

CCPC status is a prerequisite for the special incentive provisions in the Act, including: 
1. The small business deduction (“SBD”), which provides a preferential rate on the first $500k of a CCPC’s annual active business income earned in Canada.[3]

• CCPCs are eligible for federal and provincial corporate tax rate reductions on the first $500,000 (which is the corporation’s “business limit”) of active business income earned in Canada in the taxation year. To prevent the proliferation of the SBD among several corporations, the business limit must be shared amongst CCPCs that are associated corporations.[4]

• Active business income (“ABI”) is any income of a corporation other than income from property, a specified investment business or a personal services business.[5]

• Small CPPCs that claim the SBD and meet certain conditions, may have different balance-due-days (the date by which you have to pay the remainder of the tax you owe for the tax year).

• Generally, corporation taxes are due two months after the end of the tax year. [6]
• However, the balance is due three months after the end of the tax year if specific conditions are met.[7]

• A corporation’s tax year is its fiscal period, which cannot be longer than 53 weeks or 371 days”.[8]

2. Refundable investment tax credits (including an enhanced ITC rate and the ability to get a refund under the SR&ED program).[9]

• Investment tax credits (“ITC”) may be earned in respect of various investments or expenditures.[10]
  • The definition of investment tax credit in s. 127(9) of the Act determines the amount of ITC that is available to a taxpayer at the end of a tax year.[11]
• ITC includes scientific research and experimental development (“SR&ED”) credits.
  • Where CCPCs meet certain requirements SR&ED ITC may be earned at the enhanced rate of 35 percent (15% basic rate + 20% enhancement).[12]
  • The enhanced rate may be earned on qualified SR&ED expenditures up to an expenditure limit of $3 million. The Act provides a formula to determine the expenditure limit.[13]
    • Qualified expenditure means all the amounts that qualify for calculating the investment tax credit in a tax year, save repayments of assistance and contract payments made in a year.
• In some cases, CCPCs may receive all or part of their current year earned ITC as a cash refund.[14]

3. The deferred recognition of employee stock option (“ESO”) benefits.

• Where an employee’s benefits are those of a CCPC, the employee is not required to pay tax on the benefit until after they sell the shares.[15]

4. If the CCPC qualifies as a small business corporation, the capital gains exemption (“CGE”).

• A CGE may be claim when an individual taxpayer resident in Canada disposes of shares of a qualified small business corporation (“QBSC”).[16]
• Access to the CGE can be multiplied by having several family members hold shares of a QSBC directly or indirectly.[17]

5. A shorter time-period during which the CRA is permitted to reassess a taxation year.

• The normal reassessment period for a CPPC is three years rather than four years beginning the day after sending a notice of an original assessment for the relevant taxation year or a notification that no tax is payable for that year.[18]

6. A longer time-period to pay the balance of tax payable.

• Generally, corporate taxes are due two months after the end of the year however the balance of tax is due three months after the end of the tax year if conditions 1 AND 2 are met, as well as 3 OR 4.

1. the corporation CCPC throughout the tax year
2. the corporation claimed the small business deduction for the current or previous tax year
3. the corporation's taxable income for the previous tax year does not exceed its business limit for that tax year (if the corporation is not associated with any other corporation during the tax year)
4. the total of the taxable incomes of all the associated corporations for their last tax year ending in the previous calendar year does not exceed the total of their business limits for those tax years (if the corporation is associated with any other corporation during the tax year).[19]

*An additional refundable tax is imposed on the investment income of a CCPC.

• The tax is to prevent any personal tax deferral advantage of earning passive investment income through a CCPC as opposed to as an individual earning the investment income directly.
• The tax is calculated as 10. 67 percent of the lesser of:
  • The CCPC’s “aggregate investment income” for the year
  • The amount, if any, by which the corporation’s taxable income for the year exceeds the amount that is eligible for the SBD.[20]
• The tax is refunded when the CCPC pays a taxable dividend to its shareholders.[21]
• Refundable tax is also imposed on portfolio dividend income earned by a CCPC at a rate of 38.33 percent.[22]

Similar CCPC Status Incentives under Alberta Corporate Tax Act (Provincial Laws)
The Alberta Corporate Tax Act provides similar incentives consistent with the federal rules. The Tax and Revenue Administration (TRA) administers the Act.
 
1. Alberta Small Business Deduction (“ASBD”).

• The ASBD may be deducted by a CCPC.[23]
• It is formulated on the federal small business deduction though the deduction rate and qualifying amount of income from an active business for deduction are different.
• The ASBD rate is 6 percent resulting in an Alberta small business tax rate of 2 percent.
• It may be applied to reduce income from an active business carried on in Canada up to $500,000, which must be shared with any association corporations.

2. 6-month filing deadlines are not applicable to CCPCs that have already filed a corporate income tax (T2) return with CRA.

• A CCPC is not required to file a return for a taxation year because the corporation is deemed to have filed a return for the year under the Alberta Corporate Tax Act on the date it filed its return of income for the year under Part I of the federal Income Tax Act and;
• The return filed under the federal Act is deemed to be the return filed under the provincial Act.[24]

3. A shorter reassessment period.

• The normal reassessment period of a corporation if it is a CCPC at the end of the year is 3 years. In any other case, the period is 4 years.[25]

4. A longer time period to pay the balance of tax payable.

• The balance of tax payable is by the end of the third month following the taxation year for CCPCs whereas the balance due date is by the end of the second month for other corporations.[26]

[1] Income Tax Act, RSC 1985, c 1 (5th Supp), ss 125(7) Definition of “Canadian-controlled private corporation”.
[2] Ibid, ss 248(1) Definitions; s 262.
[3] Ibid, ss 125(1) Small business deduction; s 125(1.1) Small business deduction rate.
[4] Ibid, ss 125(2) Business limit; s 125(5) Special rules for business limit.
[5] Ibid, ss 125(7) Definition of income of the corporation for the year from an active business.
[6] Ibid ss 157(1)(b) Payment by corporation.
[7] Ibid ss 157(1.1) Special case; ss 157(1.2) Small-CCPC; ss 157(1.3) Taxable income – small-CCPC; ss 157(1.3) Taxable
  capital – small-CCPC; ss 157(1.5) No longer a small-CCPC.
[8] Canadian Revenue Agency, “Fiscal period for income tax purposes” (14 April 2021), online: Government of   
  Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-
  income/business-income-tax-reporting/fiscal-period-income-tax-purposes.html>.
[9] Ibid, ss 129(9).
[10] Ibid, ss 127(5) Investment tax credit.
[11] Ibid, ss 127(9) Definition of “investment tax credit”.
[12] Ibid, ss 127(10.1) Additions to investment tax credit.
[13] Ibid, ss 127(10.2) Expenditure limit determined; ss 127(10.21) Expenditure limits – associated CCPCs; ss
    127(10.3)
    Associated corporations; ss 127(10.6) Expenditure limit determination in certain cases.
[14] Ibid, ss 127.1 (1) Refundable investment tax credit; ss 127.1 (2) Definition of “refundable investment tax credit”;
    ss 127.1(2.01) Additions to investment tax credit; ss 149(1) Miscellaneous exemptions.
[15] Ibid, s 7; ss 110(1)(d) Employee options; ss 110(1)(d.1) Idem.
[16] Ibid, ss 110.6(1) Definitions; ss 110.6(2.1) Capital gains deduction – qualified small business corporation shares.
[17] Ibid, ss 110.6(14) Related persons, etc.
[18] Ibid, ss 152(3.1) Definition of normal assessment period.
[19] Ibid, ss 157(1)(b).
[20] Ibid, ss 152(1) Assessment; ss 123.3 Refundable tax on CCPC’s investment income; ss 129(3) Dividend refund to
    private corporation.
[21] Ibid, ss 129 (1) Dividend refund to private corporations.
[22] Ibid, ss 186(1) Tax on assessable dividends.
[23] Alberta Corporate Tax Act, RSA 2000, c A-15, ss 22(1) Small business deduction; ss 22(2.198).
[24] Ibid, ss 36(1.1) Return to be filed; ss 36(1.3).
[25] Ibid, ss 43(0.1) Assessment period, reassessment, etc.
[26] Ibid, ss 38(1.1) Payment on account.