The Bookkeeper's Notes on CCPC
Canadian Controlled Private Corporations
Part 1 of a 3 Part Series

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.

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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.

What is a CCPC?

To be a Canadian Controlled Private Corporation (CCPC) you must meet the following criteria:

1. The corporation must be a resident of Canada; incorporated in Canada or a resident on June 18, 1971
   
2. It must not be controlled by one or more non-residents, one or more public companies or a combination of non-residents and public company.

When Should You Incorporate as a CCPC 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?

Keep reading to find the answer ...

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

Province	Act	Acronym
Canada	Canada Business Corporations Act	CBCA
Newfoundland	Newfoundland and Labrador Corporations Act	NLCA
New Brunswick	New Brunswick Business Corporations Act	NBBCA
Nova Scotia	Nova Scotia Business Companies Act	NS Companies Act
Quebec	In 2011 Business Corporations Act (Quebec) Prior to 2011 Companies Act (Quebec)	QBCA
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

How to Prepare a Corporate (CCPC) Tax Return (T2) Yourself

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:

1. Enter your balance sheet into Schedule 100 (GIFI (General Index of Financial Information) format).
2. Enter your income statement into Schedule 125 (GIFI format).
3. Enter your shareholder information into Schedule 50.
4. Complete Schedule 8 ... enter all your capital asset purchases and disposals here by capital cost allowance class. If you follow my link, towards the end of the chat I explain how to determine how much CCA to claim in a year.
5. Complete Schedule 1 which calculates your net income (loss) for tax purposes. This schedule starts with your net (income) loss for accounting purposes from your GIFI statements then adds back accounting items that are treated differently for tax purposes and deducts the allowable taxable deductions.
   
6. Complete Schedule 200 (the 8 page T2 jacket) ... remember to answer "no" to IFRS. In Madan's example, the company qualifies for the small business deduction.

Once the steps above have been completed, the tax program will:

1. determine your taxable income by deducting items such as dividends received, charitable donations and/or deductible losses.
2. calculate your Allowable Business Income (ABI) (see Schedule 7),
3. determine your tax payable - Part I (see side bar)
   
4. determine your tax payable of investment income by calculating Aggregate Investment Income (AII), refundable taxes, refundable dividend tax on hand
5. determine your tax payable - Part IV

Please be aware that Madan's example is for a very basic CCPC return and very likely will NOT be suitable for your needs.

For 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 Tax Rate and Limits - Small Business Deduction

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:

• $500,000 federally for 2009 to 2022
• $400,000 federally for 2007 to 2008
• $300,000 federally for 2005 to 2006
• $250,000 federally for 2004
• $225,000 federally for 2003
  
• $200,000 federally for 2002
  

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%

Schedule 7 calculates ABI which 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. Incidental property income is deemed ABI; that is interest from temporary cash balances or temporary rentals of excess space. **NEW** The concept of a substantive CCPC was introduced in the 2022 federal budget to restrict a CCPC from artificially losing its CCPC status by manipulating a corporation's status to defer tax on passive investment income. 
• Specified Investment Business (SBI) whose main purpose is to earn income from property such as interest, rent, royalties or dividends income. There is an exception if you have five full-time employees working on this.
  
• Personal Service Business (PSB) income from an incorporated employees is discussed later on this page. There is an exception if the PSB has more than five full time employees.

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.

CCPC and Personal Corporations - The Incorporated Employee

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.

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:

• 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"
• Is Your Corporation a Personal Service Business? by Mark Goodfield, Cunningham LLP (see The Blunt Bean Counter blog January 2012)
• Personal services business: Once a fairytale, now a horror story by Deloitte Canada published in the Globe and Mail July 23, 2012
  
  
  

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.

Selling or Redeeming CCPC Shares

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.

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.

See you on the next page ...
Your tutor Lake

Bookkeeping Essentials › Canadian Bookkeeping Resources › CCPC