CHAPTER 13:

The Canadian-Controlled
Private Corporation

Prepared by

Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint

Copyright 2016 McGraw-Hill Education Limited

The Canadian-Controlled Private

Corporation
I.
II.
III.
IV.
V.
VI.

Definition and Basic Principles

Taxation of Income Earned by a CCPC
Benefits of Incorporation
Dividend Policy
Loans to Shareholders
Limitation of the Small Business
Deduction
VII. Overall Tax Calculation for a CCPC

I. Definition and Basic Principles

A private corporation that is not controlled by:
a public corporation or
a non-resident of Canada.

CCPCs are distinguished in three basic ways:

rates of tax,
double taxation, and
secondary relationships.

Rates of Tax
There are different rates of tax for different levels of
income.
First $500,000 of annual active business income is
subject to a reduced rate of tax.
Lower than other corporate rates and
Lower than majority of personal tax rates.

Double Taxation
Only income over $500,000 is subject to double taxation
all income of a public corporation is subject to double taxation.

Corporation
Earn ABI

Perfect Integration
=
No Tax difference

Individual
Earns ABI

Secondary Relationships
CCPCs are closely associated with their shareholders.
secondary relationships are common:
Employee
Creditor, lessor, etc.

These relationships do not exist with public corporations.

II. Taxation of Income Earned by a CCPC

Net income for tax purposes must be allocated into five
areas before taxes can be computed:
A.
B.
C.
D.
E.

Active business income

Specified investment business income
Capital gains
Personal services business income
Dividends

A. Active Business Income (ABI)

Definition: Business income from any business carried
on by the corporation other than:
a specified investment business and
a personal services business.

Includes property income closely related or incidental to

business activities:
i.e. interest income earned on overdue accounts receivable.

Tax Treatment of ABI

First $500,000 x 17.5%
Referred to as the small business deduction (SBD).

The $500,000 SBD limit is an annual amount;

if unused, cannot be carried over to other years.

Tax Treatment of ABI

ABI:

Corp A

Corp B

Year 1

$400,000

$500,000

Year 2

600,000

500,000

$1,000,000

$1,000,000

Year 1

$60,000

$75,000

Year 2

102,000

75,000

$162,000

$150,000

Total over two years

Taxes payable

Total payable over 2 years

Tax savings of 12,000

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Tax Treatment of Income Distributions

CCPCs are taxed on active business income at both low
and high rates
Creates a two-tier effect on corporate distributions
(dividends).
The following example shows the effects and assumes
the shareholder is in the highest individual tax bracket.

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Tax Treatment of Income Distributions

First $500,000
of ABI
$ 1,000

Income in
excess
$ 1,000

(150)

(270)

$ 850

$ 730

Shareholder income

$850

$ 730

Personal tax

(349)

(256)

$ 502

$ 474

$ 150

$270

349

256

$ 499

$ 526

Corporate income
Tax (15% / 27%)
Income available for dividends

After tax cash kept

Total tax:
Corporation
Personal

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B. Specified Investment Business Income

A business with a primary purpose to earn property
income which includes:
interest,
rents,
royalties and
dividends from non-affiliated foreign corporations.

Dividends from other Canadian corporations and foreign

affiliates are excluded.
these dividends are not taxable.

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B. Specified Investment Business Income

Two arbitrary exceptions:
1. Rental income that is derived from the leasing of movable
property (vehicles and equipment) is considered to be
active business income.
2. Other property income is considered to be active business
income only if the corporation employs more than five fulltime employees to generate that income.

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Tax Treatment of Specified Investment

Business Income
Disqualified as ABI:
is not entitled to the SBD or
the 13% general rate reduction.

In addition a special refundable tax of 10 2/3% must be

paid.
This special refundable tax is fully refundable to the
corporation upon payment of dividends.

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Tax Treatment of Specified Investment

Business Income
Combined federal and provincial rate is 50 2/3%
38% - 10% + 12% (assumed provincial rate) + 10 2/3%

The special refundable taxs purpose is to eliminate

any tax advantage from holding investments in a
private corporation

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Tax Treatment of Income Distributions

Corporate income (rent, royalty etc)

$1,000

Corporate tax @ 40%

(400)

Special refundable tax @ 10 2/3%

(107)

Potential refund when paying dividend @

30 2/3%

307

Total available for dividend

$800

Shareholder income (dividend)

$ 800

Tax (net of tax credit)

(328)

Total after tax cash

$ 472
Total tax paid
Corporation $200
Shareholder

Total combined tax rate

328

$528
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53%

Tax Treatment of Income Distributions

Three points of tax activity:
Tax at 50 2/3% on income
Refund of 30 2/3% when income is distributed
Individual taxed on dividend when received

Combined tax is 53% or 3% higher than had the

individual earned income directly
Results will vary depending on the specific province
as provincial corporate rates vary
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C. Capital Gains
Taxable capital gains treated the same as specified
investment business income.
Non-taxable portion of capital gains can be distributed by
a capital dividend
a mechanism to avoid double taxation on capital gains,
A tax free distribution to the shareholders

Amount of tax-free capital dividends are accumulated in the

capital dividend account (CDA)

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D. Personal Services Business (PSB) Income

A PSB is a business that provides services,
person providing the services is a specified shareholder of the
corporation, and
The relationship between the person providing the services and
the entity receiving the services is of an employment nature.

Not eligible for the SBD or general rate reduction on that

income, and
Faces significant restrictions on deductions.
Subject to a federal rate of 33% (normal rate of 28% +
additional 5%)
No employment relationships = business income is ABI
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E. Dividends
Taxable Canadian dividends received by a CCPC are
subject to special tax treatment.
Special treatment depends on the degree of ownership
that the corporation has in the corporation paying the
dividend.

21

Dividends Received from

Non-Connected Corporations
Non-connected if:
Includes dividends
received from public
corporations

Private Corporations
< 10% voting shares
Other Corp

Non-Connected Dividends received are taxed at 38 1/3%

(Part IV tax) of actual dividends received but this tax is
fully refundable upon the payment of dividends

22

Dividends Received from

Connected Corporations
Connected if:
Includes dividends
received from public
corporations

Private Corporations
> 10% voting shares
Other Corp

Connected Dividends not subject to Part IV tax, unless

Paying corporation receives a refund of its Part IV tax,
Receiving Corporation pays Part IV tax equal to its % of refund.

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III. Benefits of Incorporation

Whether to operate a business or hold investments in a private
corporation or not involves both tax and non-tax considerations
We will focus on the tax considerations

24

A. Benefits of Incorporating a Business

1. Tax Deferral The Small Business Deduction
Incorporating as a CCPC permits access to the SBD on
ABI.

benefit is a tax deferral second level of tax on corporate

distribution to the shareholder or when the shares are sold.
Shareholder
2nd level
of tax

CCPC - ABI

Deferring tax on ABI has two basic advantages:

1. Increased cash flow - lower taxes means more can be reinvested,
resulting in greater ultimate ROI.
2. Increased cash flow at early stages of a business reduces risk of
failure.

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A. Benefits of Incorporating a Business

2. Employment benefits:
. Shareholder:
who participates in the management, and
is entitled to receive compensation as an employee.

. Employment Benefits paid to owner/manager:

are fully deductible from the employers income
May or may not be taxable to the employee.

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A. Benefits of Incorporating a Business

3. Flexibility in Family Ownership
The corporate structure allows flexibility in:
Bringing in family member better income splitting opportunities.
Changing the % ownership.
QSBC may be entitled to $824,176 (2016)

4. Stabilization of Annual Income

two-tier system of taxation, gives the shareholder the right to
choose when the second level of tax will occur.
Flexibility permits the owner to fully utilize the progressive tax
rates imposed on individuals.

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5. Primary Disadvantages
Primary disadvantage relates to the utilization of
losses:
Losses are locked within the corporation
cannot be offset against income earned by the shareholder,
Opportunity to use losses to generate cash flow through
reduced taxes on other income is restricted.

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B. Benefits of Incorporating Investments

The incorporation of investment income and capital gains
does not result in substantial tax advantages for the
individual.
Investments are taxed at the high corporate rate
no substantial tax deferral occurs since:
Corporate tax
rate

Personal
Approx. =
tax rates

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IV. Dividend Policy

Distributions Dividends versus Salary:
A CCPC managed by its shareholder can distribute income by
salary or dividends.
The optimum combination and the timing of the payments
depends on:
nature of the corporate income as well as
both personal and corporate income levels.

Difficult to establish a single policy.

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A. Ordering of CCPC Dividend Distribution

CCPC can distribute three categories of dividends:
Capital tax free distributions
To the extent there is a balance in the Capital Dividend Account

Eligible receive a larger dividend tax credit (DTC)

Therefore a lower, overall rate of tax
To the extent there is a balance in its GRIP

Non-eligible receive a lower DTC

When a CCPC declares and pays a dividend, it must

formally designate the type as one of the three.
Both eligible and non-eligible triggers a refund of RDTOH
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A. Ordering of CCPC Dividend Distribution

The following dividend ordering would be
considered:
Capital dividends
Eligible dividends
Non-eligible dividends

32

B. Distributions Dividends versus Salary

Where CCPC is managed by its shareholder, it can
distribute salary or dividends
Salaries reduce corporate income as they are
deductible from taxable income
Must be reasonable in the circumstances

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B. Distributions Dividends versus Salary

1. For income > $500,000
. If shareholder requires funds, corporation should pay
salary
Corporation saves 27% tax of salary;
Income of shareholder increases
Additional tax of approximately 50% (depends on income
level and province)

If paid dividend, combined tax is approximately 53%,

as shown in previous examples.

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B. Distributions Dividends versus Salary

1. For income > $500,000
If shareholder does not need additional funds:
Leaving funds in the corporation - gain a 23% tax
deferral (50% personal rate less 27% corporate rate)
Funds will be subject to double tax of approximately
3% when distributed
Effect is reduced as the time of the tax deferral increases

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B. Distributions Dividends versus Salary

2. On first $500,000 of income
If shareholder needs funds:
Paying salary shifts income to shareholder
Taxed only once at 50%

Paying dividends
Corporation first taxed at 15%
Second tax follows
Combined tax approximately 50%
Actual result varies by province

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B. Distributions Dividends versus Salary

2. On first $500,000 of income
If shareholder does not need funds:
No payment should be made
Retain corporate income taxed at low rate of 15%
Use funds for reinvestment
Further distributions are not subject to double taxation

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C. Capital Dividend Account and

Capital Dividends
Only applicable to private corporations
Tracks:
The non taxable portion of Capital gains (net of capital losses)
Insurance proceeds

Can be paid out tax-free to shareholders to the extent

there is a positive balance in the Capital Dividend
Account.
Cumulative Account, can be paid out at any time in the
year. Requires election.

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V. Loans to Shareholders
A corporation is permitted to loan funds to
shareholders provided:
Shareholder is also an employee and
loan is advanced due to the employment relationship,
for the following purposes:
1. To assist acquiring a personal residence.
2. To acquire treasury shares in the corporation.
3. To acquire an automobile to be used in performing
employment duties.
4. For any purpose to a shareholder who is not a specified
employee
Owns 10% or more of corporations shares, or does not deal at
arms length
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V. Loans to Shareholders
Loans for the above purposes have no tax
consequences,
provided that the repayment terms are reasonable.

There is no requirement that the loan bear interest;

No interest: taxable benefit = prescribed rates
Interest < prescribed rate: taxable benefit = the difference

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V. Loans to Shareholders
Loans for other reasons (than those mentioned):
Must be repaid within one taxation year of the year in
which the advance was made; otherwise
Full amount of the loan will be taxable to the
shareholder as business income.
If these loans are later repaid, a deduction from income is
permitted in the year of repayment.

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V. Loans to Shareholders
S/H loan of $50,000 made in Feb 20X6
Corporate Y/E May 31
Loan repaid August 20X7
Consequences:
20X6shareholder includes in income
20X7shareholder deducts from income

$50,000
$50,000

Deduction not allowed if considered a series of loans!

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VI. Limitation of the Small Business

Deduction
Associated Corporations
Two or more corporations must share the SBD on the first
$500,000 of annual active business income.
Might entice shareholders into using multiple corporations
Claiming multiple SBD is limited by associated corporation
rules
Definition of association is complex
CRA can deem corporations to be associated
when it may reasonably be considered that one of the main
reasons for the separate existence of those corporations is
to reduce tax.
most important factor is control
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A. Associated Corporations
1. Two Corporations are associated if:

One of the corporation controlled the other

corporation
A
60%

B
60%

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A. Associated Corporations
2. Corporations are associated if:

Both corporations are controlled by the same

person or group of persons
A (100%)

XYZ

A (60%)

B(40%)

ABC

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A. Associated Corporations
2. Corporations are associated if:

Both corporations are controlled by the same

person or group of persons
A (50%)

B (50%)

A Co.

A (50%)

B (50%)

B Co.

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A. Associated Corporations
3. Corporations are associated if:
One corporation is controlled by the one person and
That person is related to the person who controlled the
other corporation, and
That either person owned not less than 25% of any class of
shares of both corporations
Individual Y
(spouse of X)

Individual X
100%

30%

70%

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A. Associated Corporations
4. Corporations are associated if:
One corporation is controlled by one person and
That person is related to each member of the group that
controlled the other corporation, and
That person owned not less than 25% of any class of
shares of both corporations

Individual X

Individual Y
(son of X)
30%

100%

Individual Z
(spouse of X)
30%

25%

Others

15%

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A. Associated Corporations
5. Corporations are associated if:
Each corporation is controlled by a related group and
Each person from one group is related to each member of the
other group, and
One or more persons who are members of both groups owns
not less than 25%

Individual
X

Individual
Y

Individual Q
(brother of Y)

Individual R
(sister of Y)

25%
50%

50%

40%

35%

B
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B. Large Corporation
The Small Business deduction only applies to CCPCs of
a certain size.
The $500,000 business limit is gradually reduced once a
CCPC and its associated corporations reach taxable
capital in excess of $10 million.
The entire business limit is reduced to zero once the
associated group reaches $15 million in taxable capital.

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VII. Overall Tax Calculation for a CCPC

Summary Tax Calculation
Part I tax

Federal Tax (38%)

XXX

Less

Abatement (10%)

(XX)

Plus

Refundable tax 10 2/3%

XX

Less

SBD (if applicable)

(XX)

Less

M&P (if applicable)

(XX)

Less

GRR (if applicable)

(XX)

Less

Foreign tax credit (if applicable)

(XX)

Add

Provincial Tax

XX

Total Part I tax (Federal and Provincial)

XXX

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VII. Overall Tax Calculation for a CCPC

Summary Tax Calculation, continued
Part IV tax
On dividends received from non-connected
corporations (38 1/3% of taxable dividends)

XX

On dividends received from connect corporations

(depends on paying corp. dividend refund

XX

Less

Total Part IV tax

XXX

Dividend refund

(XX)

Total tax owing (Part I + Part IV dividend refund)

XX

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Refundable Tax on CCPCs Investment Income

Refundable tax is 10 2/3% of the least of:
Aggregate investment income, or
Taxable income minus income eligible for the SBD

In most situations, the 10 2/3% is applied to

aggregate investment income

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Refundable Tax on CCPCs Investment Income

Aggregate investment income:
Canadian and foreign net property income:
interest,
rents,
royalties,
less related expenses
net taxable capital gains (gains minus losses) for the current
year less any net capital losses from other years claimed in the
current year.
Dividends from taxable Canadian corporations are excluded
from the definition.

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Refundable Dividend Tax on Hand (RDTOH)

The RDTOH is designed to accumulate the eligible tax
refund that occurs when dividends are paid to
shareholders.
The potential refund consists of all Part IV taxes paid by
the corporation plus 30 2/3% of all investment income
earned.

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RDTOH
Balance beginning of year
Less:

XX

Dividend refund for preceding year

(XX)

1. Part IV tax paid in current year

XX

2. Refundable portion of Part I tax = least of:

XX

Add:

30 2/3% x Aggregate investment income

30 2/3% x (Taxable income less income
eligible for SBD)
Part I tax
Balance at end of year

XX

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Dividend Refund
A corporation that has taxes eligible for a refund receives
that refund when dividends are distributed to its
shareholder(s).
The dividend refund is equal to 38 1/3% of the dividend
paid, but it cannot exceed the balance in the RDTOH.

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General Rate Income Pool (GRIP)

Designed to accumulate after-tax earnings that can
be paid as an eligible dividend
Generally, it reflects after-tax business income not
eligible for the small business deduction
Dividends paid from this pool (ie. Eligible dividends)
receive a higher dividend tax credit

58

GRIP
Balance beginning of year
Add:

XX

72% of
Taxable income

XX

Less:
Income subject to SBD

(XX)

Aggregate investment income

(XX)
XX * 72%

Add:

Eligible dividends received

Less:

Eligible dividends paid in previous

year

XX
XX
(XX)
XX

Balance at end of year

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Investment Tax Credit (SR&ED)

Significant flexibility when deducting scientific
research and development costs (SR&ED)
Qualifying expenditures may be deducted in
calculating net income for tax purposes (Chapter 5)
May also be eligible to receive an investment tax
credit (ITC) to reduce income tax payable and/or
create a cash refund.

Investment Tax Credit (SR&ED)

ITC for Canadian corporations is 15% of qualified
expenditures
Enhanced rate of 35% for CCPCs

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Investment Tax Credit (SR&ED)

Basic ITC rules for CCPCs:
Enhanced rate of 35% applies only to the first $3 million of
annual SR&ED expenditures
15% above that limit
When investment tax credit exceeds current years income
tax, unused ITC can be carried back three years or forward
20 years
Will reduce taxes in those years
OR
Can claim and receive a cash refund for excess ITC

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Investment Tax Credit (SR&ED)

Basic ITC rules for CCPCs:
Availability of the 35% enhanced rate is restricted
based on the CCPCs taxable income and taxable
capital employed in Canada (TCEC)
Reduction begins when taxable income of the previous year
is between $500,000 and $800,000
And
When TCEC is between $10 million and $50 million

ITC claimed as a tax reduction or cash refund is

deducted from the pool of unused SR&ED
expenditures
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