I'm going to be upfront here. I do not have a lot of experience with CCPC (Canadian controlled private corporations) as I specialize in sole proprietorships ...
... so this page is just The Bookkeeper's Notes on CCPC.
... where I track things as I learn them ... so I can have easy reference back to them later.
Canadian controlled private corporations have unique tax planning opportunities in Canada, especially for the owner managed corporations.
I have found there is a wealth of free information on self-employment and/or sole proprietor bookkeeping and taxes ... but not so much on how to keep corporate books or how to prepare your corporate tax return. I'm guessing it is because it is a more complex subject ...and a mistake ... such as not making an election when needed, or utilizing owner manager remuneration strategies incorrectly, or not planning in advance how you are going to use your capital losses before they expire ...could cost you a lot of money ... and it is very hard and expensive for an accountant to get you out of hot water once you're in it ... and some things can't be fixed, so what's done is done. You pay for your mistakes ... an expensive lesson on learning the CCPC rules.
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.
INDEX for My Notes on CCPCs
Is Incorporation Right For You And Your Business?
I will continually add topics and information about CCPC - Canadian Controlled Private Corporations as I come across them ... and I know I'm repeating myself but ...
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.
To be a Canadian Controlled Private Corporation (CCPC) you must meet the following criteria:
You operate a business as a sole proprietor or a partnership. Is it the right time to incorporate your business as a CCPC?
Keep reading to find the answer ...
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
|Canada||Canada Business Corporations Act||CBCA|
|Newfoundland||Newfoundland and Labrador Corporations Act||NLCA|
|New Brunswick||New Brunswick
Business Corporations Act
|Nova Scotia||Nova Scotia Business Companies Act||NS Companies Act|
|Quebec||In 2011 Business Corporations Act (Quebec)
Prior to 2011 Companies Act (Quebec)
|Ontario||Ontario Business Corporations Act||OBCA|
|Manitoba||Corporations Act (Manitoba)||MCA|
|Saskatchewan||Business Corporations Act (Saskatchewan)||SBCA|
|Alberta||Alberta Business Corporations Act||ABCA|
Resource: Doing Deals in Canada: A Practical Guide January 2010 at lavery.ca
While I don't recommend you actually do your own corporate tax return (T2), I found an article accompanied with a video on how to prepare a CCPC T2 return yourself by Madan, CA; a chartered accountant in Ontario. As I've been asked this question many times, I thought I'd share the link.
I really need to emphasize that I don't advise you do this though because the instructions are for a very basic company and omit common schedules you may be required to fill out. Also, you could end up paying yourself a dividend that is not approved in your minutes, or forgetting to report your passive income, or .... basically creating a whole bunch of trouble for yourself.
Go to madanca.com> blog> tax tips> How To Prepare Corporation Income TaxReturn For Business In Canada. It's tricky to find so you might have to cut and paste the article title into his search box to actually find the article.
You will need to have your year-end complete before you prepare the return as you need your adjusted balance sheet and income statement. The first step in preparing a corporate tax return is to input or import your financial statements in GIFI (General Index of Financial Information) code to Schedules 100 and 125.
Madan explains where to get your corporate tax forms on the CRA website (type "T2 returns and schedule" in CRA's search box) along with what forms you need (for his example); Schedules 100, 125, 50, 8, 1 and 200.
Here is an overview of the steps:
Once the steps above have been completed, the tax program will:
Please be aware that Madan's example is for a very basic CCPC return and very likely will NOT be suitable for your needs.
example, the article (haven't watched his video yet) seems to have
ignored calculating active business income on Schedule 7, so please make
sure you at least have your first return prepared professionally. Schedule 7 requires you input your passive / investment income to determine your ABI.
If you then decide to do it yourself the following year, make sure you have the prior year tax return beside you and that you have not missed any schedules required for your business situation.
Before you attempt to do your T2 preparation yourself, ask yourself if you are really going to save money long term by not hiring a tax accountant. You don't know what you don't know.
CCPC are taxed favorably (interpret that as lower or at a reduced rate) on Active Business Income (ABI) up to the small business threshold or limit which was:
This favorable rate reduction is called the Small Business Deduction (SBD).
Amounts eligible for reduced tax rate instead of the general 15% tax rate:
2019 to 2022 - 9% SBD tax rate; general tax rate 15%; investment income 38.7%
2018 - 10% SBD tax rate; general tax rate 15%; investment income 38.7%
2016 & 2017 - 10.5% SBD tax rate; general tax rate 15%; investment income 38.7%
2014 to 2015 - 11% SBD tax rate; general tax rate 15%; investment income 34.7%
2012 to 2013 - 11% SBD tax rate; general tax rate 15%
2011 - 11% SBD tax rate; general tax rate 16.5%
2010 - 11% SBD tax rate; general tax rate 18%
2009 - 11% SBD tax rate; general tax rate 19%
2008 - 11% SBD tax rate; general tax rate 19.5%
General corporate tax rate 38%
- federal abatement 10%
- small business deduction 13%
= CCPC tax rate 15%*
*Personal Service Corporations do not qualify for this rate. There is an additional tax on investment income. Provincial corporate tax is an additional tax. Effective January 1, 2019 new passive investment income also affects the small business deduction.
Schedule 7 calculates ABI which excludes:
Effective January 1, 2019, new passive investment income rules come into effect that may clawback your Small Business Deduction. CCPCs can earn between $50,000 and $150,00 in passive income before the business limit phases out. Previously the phase out was only based on taxable capital employed in Canada. The CRA website explains the reduction in the CCPC business limit will be the greater of its taxable capital business limit reduction and its passive income business limit reduction for the year.
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 2013 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.
The Minister of Finance released draft legislation on October 31, 2011 that will increase the federal personal services business tax rate of CCPCs to 25% from 15% for taxation years beginning after October 31, 2011.
The legislation denies a PSB the general rate reduction meaning tax deferral benefits are eliminated. Read Collins Barrow's article for more information. Deloitte's has a great article too!
These proposed changes were included in the October 24, 2012 Notice of Ways and Mean Motion put forth by the Department of Finance. They are now law and in effect for the tax years ending on October 31, 2012 forward.
The tax rate for 2013 has increased to 28%. This means you now pay $280 in federal tax for every $1000 of income. Before this legislation, you paid $150 in federal tax.
You may want to talk to your accountant about restructuring or winding up your corporation.
Reference: ITA Section 123.4(1)
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 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.
You are not allowed deductions for office supplies, vehicle expenses or travel expenses, etc. With the latest changes to PSBs, you may now want to earn your income as a salaried employee.
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:
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:
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.
The Tax Guy (Dean Paley CPA, CGA) from the Canadian Tax Resource website (no longer in existence) explained 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 find a similar article to learn more about these two options 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 (the lifetime limit increases to $800,000 in 2014) ... 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 learn more about these options at wrightbusinesslaw.ca> share-sale-or-corporate-redemption.
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.
Here are 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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