Advantages to Being a Canadian-Controlled Private Corporation
The biggest corporate tax advantage of being a Canadian-controlled private corporation is being eligible for the small business deduction. This corporate tax deduction is calculated by multiplying the 2019 small business deduction rate of 19% by the least of:
- a corporation’s active business income (line 400 on the T2 corporate tax return)
- its taxable income (line 405)
- its business limit for the year (line 410)
- its reduced business limit for the year (line 425).
If the corporate tax year straddles a calendar year, you must prorate the business limit by dividing the number of days in the corporation’s tax year by 365 before entering it on line 410.
The amount of the corporation’s Small Business Deduction then gets entered on line 430.
The small business deduction applies to the first $500,000 of active business income.
The corporation is a CCPC if it meets all of the following requirements at the end of the tax year:
- it is a private corporation;
- 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;
- it is not controlled directly or indirectly by one or more non-resident persons;
- it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
- it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
- if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital 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
- no class of its shares of capital stock is listed on a designated stock exchange.
What is the current maximum capital gains deduction that can be claimed in respect of a disposition of qualified property?
In 2019, on the disposition of qualified property, an individual may be eligible for a capital gains deduction of up to $433,456, which is ½ of the $866,912 lifetime capital gains exemption (LCGE). These properties are qualified small business corporation shares, and qualified farm and qualified fishing property.
How to qualify
A share of a corporation will be considered to be a qualified small business corporation share if all the following conditions are met:
- at the time of sale, it was a share of the capital stock of a small business corporation (see below), and it was owned by you, your spouse or common-law partner, or a partnership of which you were a member;
- throughout that part of the 24
months immediately before the share was disposed of, while the share was owned
by you, a partnership of which you were a member, or a person related to you,
it was a share of a Canadian-controlled private corporation (see above) and
more than 50% of the fair market value of the assets of the corporation were:
- used mainly in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation;
- certain shares or debts of connected corporations;
- or a combination of these two types of assets;
- and throughout the 24 months immediately before the share was disposed of, no one owned the share other than you, a partnership of which you were a member, or a person related to you.
Generally, when a corporation has issued shares after June 13, 1988, either to you, to a partnership of which you are a member, or to a person related to you, a special situation exists. We consider that, immediately before the shares were issued, they were owned by an unrelated person. As a result, to meet the holding-period requirement, the shares cannot have been owned by any person other than you, a partnership of which you are a member, or a person related to you for a 24-month period that begins after the shares were issued and that ends when you sold them.
However, this rule does not apply to shares issued:
- as payment for other shares;
- for dispositions of shares after June 17, 1987, as payment of a stock dividend; or
- in connection with a property that you, a partnership of which you were a member, or a person related to you disposed of to the corporation that issued the shares. The property disposed of must have consisted of either:
- all or most (90% or more) of the assets used in an active business carried on either by you, the members of the partnership of which you were a member, or the person related to you; or
- an interest in a partnership where all or most (90% or more) of the partnership’s assets were used in an active business carried on by the members of the partnership.