The Bookkeeper's Notes on CCPC

Canadian Controlled Private Corporations

... where I track things as I learn them ... so I can have easy reference back to them later.

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So please, please, please check with your accountant before you implement any topics I mention here ... because they really are just The Bookkeeper's Notes on CCPC.

What you will find on ...
CCPC - Canadian Controlled Private Corporations

I will continually add topics and information as I come across it ...

Please use the information on this page more for talking points with your accountant ... so you have a better feel for what kind of information you are seeking.

YOU can scroll down to find a topic you are looking for or click on one of the following QUICK LINKS to go right to the spot.

• CCPC and Business Corporations Act
• Tax Compliance Notes for Corporations (opens to a different page)
• Tax Rates and Limits for Corporations (includes active income, small business deduction and taxable capital employed)
• Director's Liabilty for Taxes (opens to a different page)
• When to Incorporate - The Advantages and Disadvantages of Being a CCPC ... includes references for "kiddie tax"
• Personal Service Corporations / Personal Service Businesses
• Corporate WCB Owner Obligations and Services
• Corporate Minute Book and Annual Registration Requirements
• The Bookkeeping Forum Q&A Links Relating to Corporations
• Shareholder Benefit and The Company Vehicle ... SubSection 15(1)
• Prescribed Rates for Vehicles - Tax exempt allowances and Vehicle deduction limits
• Employee Loans / Loans to Shareholders ... not to be confused with Shareholder Loans to the Corporation
• Spousal Loans
• Management Fees and Salaries - includes owner manager remuneration
• Sell or Redeem Shares
• Inactive Corporations

CCPC and Business Corporations Act

Corporations in BC are regulated by the Business Corporations Act (BCA). Prior to March 29, 2004, BC corporations were regulated by the Company Act.

A good article by duhaime.org titled British Columbia Company Law: Business Corporation Act explains the incorporation process, share issuance, shareholder rights, entitlement of dividends, and the Board of Directors composition requirements, responsibilities and liabilities.

In B.C., audits can only be performed by a licensed CA or CGA under Part 7 Section 205 of the Business Corporations Act. All CCPC should be familiar with this Act.

An Overview of the BC Business Corporations Act, written on March 1, 2004 and in user friendly language, can be found at FMC-Law.com> Publications> Keyword = business corporations act, Area of Expertise = competition, Type = publication.

While reading the overview, I found it interesting to note that "the BCA limits a director’s liability where there is reliance in good faith on officers or professional advisors." (italics mine)

Here is a table of Corporation Acts for the rest of Canada

CCPC - Canadian Controlled Private Corporations
Tax Rates and Limits

CCPC are taxed favorably (interpret that as lower or at a reduced rate) on active income up to the small business threshold or limit ($500,000 federally for 2009 to 2012, $400,000 federally for 2008).

Active income excludes:

• Passive income such as investment income which includes taxable capital gains net of allowable capital losses, property income net of property losses, and foreign business income.
• Specified investment business whose main purpose is to earn income from property such as interest, rent, royalties or dividends income.
• Personal service business income discussed later on this page.

This rate reduction is called the small business deduction. This amount is eligible for an 11% tax rate in 2012 (11% in 2011/2010/2009/2008) instead of the general 15% tax rate in 2012 (16.5% in 2011, 18% in 2010, 19% in 2009, 19.5% in 2008).

CCPCs do not qualify for the small business rate reduction if the taxable capital employed in Canada is $15 million or more.

Taxable capital employed is generally the sum of shareholder equity, loans and advances made to the corporation, surpluses and reserves minus some types of investments in other corporations.

If your CCPC is part of a group of companies, the small business deduction is shared within the group.

Find 2008 to 2012 CCPC tax rates and business limits for all provinces and territories by clicking here . Clicking on the link will open a separate window that takes you to my favorite tax site. Remember to come back here when you've found what you needed.

CCPC also receive a break on their filing deadline if they don't have passive income.

CCPC - Canadian Controlled Private Corporations
When Should You Incorporate in Canada?

You operate a business as a sole proprietor or a partnership. Is it the right time to incorporate your business as a CCPC?

This chat gives YOU talking points to discuss with your accountant ... because incorporation isn't right for every business.

You should only consider incorporation if:

• The business is profitable ... and the profits are sustainable for the foreseeable future.
• The owner can leave profits in the business to take advantage of the lower corporate tax rate ... versus being taxed at a higher personal tax rate if not incorporated.
• The owner wants to sell the business and take advantage of the enhanced capital gain exemption ($750,000 lifetime limit on the sale of qualified shares ... does not apply to the sale of assets).
• For protection for significant product liability that cannot be covered through insurance and/or to manage risk ... but directors are still personally liable.
• The owner wants to income split with family members by paying dividends ... which can be paid to persons not active with the company ... and which are paid at a lower tax rate than employment income. If the child is under 18, see my references below to "kiddie tax".

The disadvantages of incorporating:

• Incorporation and annual reporting costs;
• Compliance reporting re annual filings, payroll, etc.; and
• Losses could be trapped in the corporation.

My conclusion after attending the IPBC webinar - if the owner is withdrawing all profits instead of leaving them in the company, there is little advantage or reason to incorporate.

Industry Canada has a chapter in their incorporation guide publication called Chapter 1 - Why Should I Incorporate? if you want to investigate further. You can find it at www.ic.gc.ca under Business Tools and Resources > Corporations Canada > Create / Maintain a Corporation > Guide to Federal Incorporation.

For information on splitting income with children under 18, see these references about "kiddie tax":

CCPC and Personal Service Corporations
The Incorporated Employee

Proposed Tax Legislation

The Minister of Finance released draft legislation on October 31, 2011 that will increase the personal services business tax rate of CCPCs by 13% after 2011. The legislation denies a PSB the general rate reduction meaning tax deferral benefits are eliminated. Read Collins Barrow's article for more information.

There is a tax issue when you are a sole shareholder and employee of a corporation in Canada. Incorporated employees need to be aware of this tax issue and how it affects them.

I came across an article at BDO Dunwoody (www.bdo.ca) titled Watch for the Personal Services Business!. Although a personal service business (PBS) is a CCPC, it operates under different rules.

The article explains that PBS rules came into existence to prevent family owned corporations and/or incorporated employees from gaining access to the small business deduction. Here is a summary on PBS rules.

CRA publication T4012 T2 Corporation Income Tax Guide defines a personal service business in chapter four line 400 as:

a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform. Instead, an individual performs the services on behalf of the corporation. That individual is called an incorporated employee. ITA 125(7)

You are considered a personal service business / incorporated employee if:

(1) you or someone related to you performs the services and owns 10% or more of any class of shares, AND

(2) without the use of the corporation, you would be considered an employee of the business receiving the service, AND

(3) fewer than 6 full-time employees are employed, AND

(4) the fee for service is not received or receivable from the associated corporation.

CRA publication IT-73R6 The Small Business Deduction also discusses personal services businesses.

For CRA to classify you as an incorporated employee, the criteria they look at is discussed and stated as follows:

(a) the entity to which the services are provided has the right to control the amount, the nature and the direction of the work to be done and the manner of doing it;

(b) the payment for work is by the hour, week or month;

(c) payment by the entity of the worker's travelling and other expenses incidental to the payer's business;

(d) a requirement that a worker must work specified hours;

(e) the worker provides services for only one payer; and

(f) the entity to which the services are provided furnishes the tools, materials and facilities to the worker.

The BDO article adds to this:

• You have a business card in the name of your client.
• You are paid on a regular basis without the submission of an invoice.
• Your name is on the client's phone directory.
• You perform ongoing services as opposed to a specific project.
• You have no risk if the project goes over budget.

You may have noticed that the criteria is very similar to the employee vs self-employed criteria.

The effect of these rules means that a PSB does not qualify for the CCPC small business deduction and ITA 18(1)(p) limits the tax deductions. You are restricted to remuneration and benefits for the incorporated employee and legal expenses incurred to collect accounts receivable.

If you are an incorporated employee, you do not benefit from the low CCPC tax rates.

Other BDO articles on this subject that may interest you are:

Independent Contractors and Personal Services Businesses; The TAX factor Issue 2007-03

Want to become self-employed? Be cautious of Personal Services Business Rules; Ken Karakashian BDO Dunwoody LLP October 2004, Brampton Board of Trade - "Trade Talks"

CCPC - Canadian Controlled Private Corporation
WCB ... Owner Obligations and Services

Click here for WCB tax filing deadline information.

If your BC CCPC has employees (even if it is just you) you must report the salaries / wages to WCB and pay assessment premiums as per section 38 and 39 of the WC Act.

You are exempt from registering with WCB if your CCPC is classified as a personal financial holding company whose activities and income are passive. The criteria includes:

1. the only workers are shareholders of the corporation;
2. the company invests only its own assets and/or the assets of its principals; and
3. no activities are pursued except the shareholders' own personal financial investments like publicly traded stocks and bonds, interest bearing instruments and non-revenue producing land, buildings or equipment (i.e. no rental activity).

Employers' Advisers (www.labour.gov.bc.ca/eao)

Please note - these services are available to sole proprietor and partnerships as well as corporations.

The experts at Employers' Advisers work independent of WorkSafeBC under section 94(3) of Worker's Compensation (WC) Act. They can help you manage your compensation costs to give your business a competitive advantage.

There is no charge to use their services because the cost of their offices are included in assessments.

They provide assistance, education, advice and representation to employers on WorkSafeBC issues.

Compliance with the WC Act is mandatory. While ignorance of the law is not a defense, due diligence is. This requires everything to be in writing ... otherwise your due diligence does not exist.

Two forms you want to ensure are complete are Due Diligence Checklist and New Worker / Young Worker Orientation Checklist. Both can be found on the worksafebc.com website.

If your tax compliance rates include a surcharge, you need to do something to reduce it back to the industry average.

The surcharge you pay is based on your claims rate ... which can be 100% higher than the industry average. It is a weighted average over a three year period. Call an employer advisor to provide advice on how to lower your premiums.

An excellent reference is Small Business Primer A Guide to the WCB.

CCPC - Canadian Controlled Private Corporations
Shareholder Benefits and The Company Vehicle

If you are driving the company car, don't forget to calculate a standby charge benefit and operating expense benefit ... and report it on a T4 or T4A depending on your circumstances.

What this means is you need to be aware of CRA's rules about shareholder benefits that arise due to personal use of the company vehicle.

Most owner-managers are employees of the corporation as well as shareholders. Use of the company vehicle is a taxable benefit and reported on a T4 slip.

However, when the shareholder is not an employee and has use of the company vehicle, then a shareholder benefit is conferred. This benefit is taxable and reported on a T4A slip.

You may also want to take some time to read CRA's publication IT-432R2 Benefits Conferred on Shareholders to make yourself familiar with what other benefits are taxable.

Subsection 15(1) discusses "the amount or value of a benefit conferred on a shareholder by a corporation in a taxation year is included in the shareholder’s income for the year, except to the extent that the benefit is deemed by section 84 to be a dividend."

A conferred benefit includes:

"(a) a payment by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction;

(b) an appropriation of a corporation’s funds or other property in any manner whatever to, or for the benefit of, a shareholder; or

(c) any other benefit or advantage conferred on a shareholder by a corporation.

If the person on whom the benefit has been conferred is both a shareholder and an employee of the corporation, a determination will have to be made, taking into consideration all the relevant facts and circumstances of the particular case, as to whether the benefit was conferred by the corporation on the person as a shareholder or as an employee. In the latter case, paragraph 6(1)(a) of the Act applies, rather than subsection 15(1)."

A more "user friendly" explanation of shareholder benefits can be found in a 2006 CGA Magazine article by David Nolke titled Shareholder Benefits: Beware the perils of a subsection popular with auditors. The article gives very practical examples of how this part of the tax act is applied. You'll find the article at www.cga-canada.org.

Click here to find a very useful guide to car expenses and benefits.

CCPC - Canadian Controlled Private Corporations
Shareholder Loans and Owner Manager Remuneration

If your company has shareholder loans, be aware of the very specific rules that apply when a corporation loans money to its shareholders who own more than 10% of the shares and their family members.

You may also want to make sure you meet CRA criteria before you take any management fees or bonuses ... to ensure there are no negative tax consequences.

Loans to Shareholders / Employee Loans

There are very specific rules when a corporation loans money to its shareholders who own more than 10% of the shares and their family members. YOU need to be careful that money you remove from the company is not at risk to be taxable.

If you and other family members own less than 10% of the corporation, your transactions are treated the same as if you were an employee.

The Tax Guy from the Canadian Tax Resource website explains shareholder loans in his August 29, 2008 blog. (This article is no longer available on his blog. It seems to have been replaced with a similar blog dated February 12, 2011 titled "How Shareholder Loans Affect Your Income Tax".) I've recapped the original article here.

Generally, when a loan is made by the corporation to a shareholder, a taxable benefit arises for the shareholder. The amount received must be included in the recipient's income in the year the money was received. When the loan is repaid, it can be deducted from income in the year of payment.

However, there are exceptions to this rule.

If the loan is repaid within the year following the corporation's year end, then the loan does not have to be included in income. The loan cannot be a series of small borrowings and repayments for this rule to apply. The Tax Guy refers to this as the one year rule.

For example, let's say your corporation has a December 31 year-end, and you as a shareholder borrowed $15,000 in 2010 from the corporation. No taxable benefit will occur if you repay the loan by December 31, 2011.

If the loan was related to normal business activity, it is not considered a shareholder loan provided there is in place actual repayment terms where interest is charged at standard rates. The terms must be met and maintained. The Tax Guy refers to this as the lenders rule.

There must be a written agreement between the shareholder and the corporation. The agreement should state the amount of the loan and the time frame the shareholder will repay the loan. The shareholder should try to make actual payments with regards the loan and not journal entries. This makes it clear there was a financial obligation and it was being met.

If the shareholder is also an employee (as most small business owners are), a loan can be advanced due to employment and it will not be considered income (it is tax free). It could be to purchase a principal residence, a vehicle to be used for business purposes or new shares in the corporation. As with the lenders rule, payments must be in place for repayment and maintained. The Tax Guy refers to this as the principle residence rule.

Do not confuse these shareholder loans with loans you made to the corporation as an investment in the business. These rules only apply when the corporation lends the shareholder/employee money.

As these are very specific rules with regards the loan transactions, you should contact a tax professional for advice specific to your situation. You may also want to read CRA's bulletins IT-421R2 and IT-119R4.

The first bulletin discusses section 80.4(2) Benefits Arising by Virtue of Shareholdings. The second bulletin discusses subsection 15(2) Shareholder Debt and Certain Persons Connected With Shareholders (also discusses 15(1)).

The Tax Guy also posted a great article on November 30, 2010 called Employer Loans to Employees. He discusses the employee benefit, as well as home purchase loans, home relocation loans, investment loans and loans to buy a vehicle. You can find it at blog.taxresource.ca> Archive (found in very smmaaallll print at the top right hand corner of the web page)> November 2010> Employer Loans to Employees

Spousal Loans

On September 25, 2009, The Vancouver Sun had a great article written by Jamie Golombek on how to income split by lending money to your spouse at the prescribed interest rate of 1%. This is where you can take advantage of an exception to the attribution rules.

By loaning money to your spouse at the prescribed interest rate, with interest paid back annually by January 30 of the following year, any resulting gains or income will be taxed in the lower income spouse's hands and not attributed back to the higher income spouse.

It is important to note that the interest income on the loan will be taxable on the higher income spouse's tax return while the lower income spouse may receive a tax deduction.

Mr. Golombek points out that although prescribed interest rates are set quarterly, the rate in effect at the time the loan was extended remains in place for the duration of the loan.

It is good practice to ensure you have a written loan agreement or promissory note stating the terms including amount, interest rate, term of the loan and repayment arrangements.

The Ernst & Young February 2009 newsletter recommends that you have a separate bank account from your spouse to preserve the source of the investments and resulting gains / income.

The Knowledge Bureau September 29, 2010 newsletter explains you need to be aware that a formal spousal loan agreement with no interest charged does NOT meet the attribution rules criteria. If 0% interest is charged, then attribution rules will apply.

Attribution rules are very specific with respect to spousal loans ... interest must be charged at a rate at least equal to a minimum rate of an available commercial interest rate or the CRA prescribed interest rates ... AND the interest must actually be paid on time.

Bookkeepers Be Aware of The Rules
Management Fees and Salaries for Incorporated Businesses

As a small owner managed corporation, before you book your management fees or bonuses this year end, check to make sure the circumstances meet CRA criteria.

In August 2009, Andrews & Company Chartered Accountants posted on their website (www.andrews.ca) an excellent tax tip on management fees and salaries. I summarize the article here ... but tax rules and therefore strategies are always changing so what was effective in 2009 may not be the best strategy for owner manager remuneration in 2011. To make my point ...

I found a BDO article from February 2011 titled Owner Manager Remuneration Strategies Integration Revisited.

The article explains how "the corporate tax system was substantially changed in 2006 with the introduction of the eligible dividend rules as an initial step to counter the stampede of corporate conversions to income trusts. At the same time, the federal government and some provincial governments started a gradual process of lowering general corporate tax rates." It discusses the advantage if the income remains and is taxed in the CCPC.

The BDO article pertaining to CCPCs is somewhat technical but worth reading. I'm not a tax expert by any stretch of the imagination. I didn't understand all the nuances but got the gist of what was being said. As I've noted before, use the article for talking points with your accountant.

BDO also released an article titled Owner-Manager Considerations on October 15, 2011 that is worth reading; as is Deloitte's January 2011 Privately Speaking - Tax Insights article by senior tax manager Robert Leombruno titled Managing Your Management Fees.

BDO's article points out that "a complicating factor to this analysis (salary / dividend mix) is the fact that the personal tax rate on dividends will increase between 2011 and 2012, and then is projected to remain at the 2012 rate." It discusses the drawbacks of dividend income and advantages of having a portion of your income taken in salary.

Okay now that I've addressed the time sensitivities of various tax strategies, here are effective owner manager remuneration strategies that are not utilized as much since the 2006 changes mentioned above.

Before reducing the corporation's tax burden by bringing this year's profits down to the $500,000 small business deduction limit through the use of management bonuses and fees, be aware that CRA can challenge the amounts if they are not reasonable as discussed in Deloitte's article mentioned above.

It is important that details be documented. There should be a written contract and the decision to pay the fees / bonuses recorded in the corporate minute book.

The fees should be for active participation in and services provided to the corporation and in line with the effort it took to earn the fees. You must have the skills related to what you are being paid for and they should be in line with other similar companies.

CRA also looks at whether the profits being distributed in this manner are a regular corporate policy.

Speak with an accounting professional before doing anything to avoid negative tax consequences. Your accountant will

• advise you regarding the best way to personally compensate yourself and when the compensation should be paid.
• help you determine the amount and whether the compensation should be taken by salary, dividends or other benefits.

Here are some points to consider:

• Taking a salary is a deductible business expense and reduces the business's income. A salary also gives you RRSP contribution room and affects your claim for child care expenses.
• The salary required for the maximum contribution for 2012 is calculated as follows: $22,970 maximum contribution allowed / 18% of earned income = $127,611 earned income.
• The salary required for the maximum contribution for 2011 is calculated as follows: $22,450 maximum contribution allowed / 18% of earned income = $124,722 earned income.
• Accrued bonuses must be paid out within 180 days (not six months) of the fiscal year end.
• Dividends are paid out on after tax dollars. The dividend income for CCPC is grossed up 125% with an offsetting dividend tax credit on your personal tax return.
• Shareholder / employee loans can draw a taxable benefit. If your corporation loaned you or a family member money, repay the outstanding loan within one year. Interest on employee loans should also be paid.

I found an excellent CGA three part series of articles on owner/manager remuneration through google. Although the series is not dated, it is an older series as CRA is referred to as CCRA. This means it was written sometime between December 1999 and January 2004. So keeping in mind the 2006 changes mentioned earlier in this chat ... although the principles will still be valid, some of the information may not be current. Check with your own accountant before doing anything. Here are the links:

1. Part 1 on salaries, bonuses, and management fees
2. Part 2 on dividends
3. Part 3 on other methods of remuneration

See CRA's publication Technical News No. 22 for their position on CCPC shareholder / manager remuneration.

CCPC - Canadian Controlled Private Corporations
Sell or Redeem Shares

The Tax Guy from the Canadian Tax Resource website explains the two different tax treatments for selling shares and redeeming shares in his September 1, 2010 blog. I'll recap very briefly here then let you know where you can read the entire blog on your own.

Sale of shares to third parties are subject to capital gains. Capital gains are eligible for the $750,000 lifetime capital gains exemption ... which means sale of the CCPC shares could have no tax consequences.

Redemption of CCPC shares are subject to a deemed dividend (ineligible) which is taxed at your marginal tax rate. Any taxable capital loss may qualify for an allowable business investment loss (ABIL). This transaction does have consequences.

An arms length sale of the CCPC shares would avoid the deemed dividend.

You can read the entire blog at blog.taxresource.ca> archive> September 2010> Sell or Redeem Shares in a CCPC.

CCPC - Canadian Controlled Private Corporations
Inactive Corporations

Remember, even if you don't owe taxes or your company is inactive, you still have to (as in must, are still required to) file your corporate tax return.

The permanent records of the corporation must be retained two years from dissolution. Mergers and amalgamations are a continuation of the business.

CCPC - Canadian Controlled Private Corporation
The Bookkeeping Forum Q&A Related Links

The Bookkeeping Forum discussed ...

Shareholder loans and how an owner managers records a "draw". Just remember once this account is at zero, no more "draws" are available without tax consequences.

Recommended Reading - Deloitte's recommends the fourth edition of Taxation of Private Corporations and Their Shareholders available through the Canadian Tax Foundation. From their newsletter:

The book is a valuable resource for entrepreneurs, owners and those who advise them. It provides an analysis of incorporation, capitalization, compensation, the acquisition and disposition of assets, the drafting of shareholder agreements, the purchase and sale of a business, and the structuring of a business in the most tax-effective manner..

The Bookkeeping Forum Q&A Links

CCPC Discussions In Progress

Here are CCPC related topics that have been covered in The Bookkeeping Forum. Feel free to check them out and give your opinion or share your expertise.

As more questions are asked, more links will show up here. So if you have a question ... and are willing to be patient while I use my resources to learn along with you ... ask away.

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