Accurately defining your business is essential. This can mean many things—like distinguishing between early-stage and late-stage for venture capital purposes, or classifying your company based on your product’s Technology Readiness Level—but the Canada Revenue Agency recognizes five types of corporations for tax-filing purposes:
- Canadian-controlled private corporations (CCPCs)
- Other private corporations
- Public corporations
- Corporations controlled by public corporations
- Other corporations
Let’s take a closer look at the first category—CCPCs. If your business qualifies as a CCPC, you can access a wide range of federal and provincial support programs. In particular, CCPCs are eligible for valuable tax deductions based on active business income, as well as tax credits. This includes, but isn’t limited to, Canada’s flagship Scientific Research & Experimental Development (SR&ED) tax credit.
What is a CCPC?
The simplest way to understand a CCPC is as a fully private corporation that was either created in Canada or has been a Canadian resident since June 18, 1971 (according to the Income Tax Act) through the relevant tax year. Other key criteria include:
- The business is not controlled, even indirectly, by one or more non-Canadian residents
- No public corporation—except a prescribed Venture Capital corporation under Regulation 6700—can have direct or indirect control over the corporation
- No controlling party may list the corporation’s shares on a designated stock exchange outside Canada
- In addition, no class of shares or capital stock of the company is listed on any stock exchange
What tax advantages does a CCPC offer?
The main benefit of qualifying as a CCPC is access to the Small Business Deduction (SBD). This allows you to claim a lower tax rate on the first $500,000 of active business income earned in Canada.
You calculate your total deductions using the T2 Corporate Income Tax form, filed at the end of each fiscal year. While the process can be complex, your deduction is based on the lowest value among four calculations: the deduction rate multiplied by your active business income (line 400), taxable income (line 405), business limit for the tax year (line 410), and reduced business limit for the tax year (line 425). The smallest of these amounts is entered on line 430 and becomes your deduction for that year.
Note: An additional refundable tax of 10.67 percent applies to a CCPC’s aggregate investment income. This is designed to prevent individuals from deferring taxes by claiming investment income through a CCPC instead of on their personal returns.
CCPC & SR&ED, other tax benefits
As a rule, CCPCs can recover up to 64 percent of eligible salary expenses, compared to just 36 percent for non-CCPCs. CCPCs can also recover up to 32 percent of qualifying subcontractor fees and 42 percent of eligible material costs for SR&ED. (See this infographic for more details.)
CCPCs can also benefit from the enhanced SR&ED Investment Tax Credit (ITC). Combined with the SBD, this lets you claim up to $3 million in qualifying R&D expenses at a 35% rate—much higher than the 15% standard rate for non-CCPCs.
The “expenditure limit” is set at $3 million if your CCPC’s taxable capital (revenue) was under $10 million in the previous year. This limit gradually decreases once your revenue exceeds $10 million, and disappears entirely when taxable capital reaches $50 million.
Other CCPC advantages include:
- The option to defer recognizing employee stock options
- A shorter reassessment period of three years (instead of the usual four)
- For CCPCs claiming the SBD, you get an extra month (three months instead of two) to pay any outstanding balance
- Quarterly corporate tax payments (instead of monthly) for small CCPCs.
How to qualify
When incorporating your business, you’ll need to meet additional requirements to achieve CCPC status, depending on where your founders and operations are located in Canada.
Where being a CCPC really pays off is at tax time. By working with tax professionals who know how to navigate government forms and the financial details needed for your T2 filing, you can maximize your returns and extend your CCPC’s runway.
Best of all, Boast has a proven track record of defending claims during audits or reassessments, so you can rest easy knowing your filing is not only optimized, but fully taken care of.
Boast offers a complete solution to help you maximize your tax incentive claims and remove the guesswork from traditional processes. Boast integrates securely with hundreds of systems, making it easy to capture and qualify your SR&ED investments in real time. Request a demo with our team today to get started.
