As we’ve discussed recently, properly qualifying and incorporating your business can have a significant impact on your taxes. This is true in both the United States and Canada, where a variety of tax credits and grant programs from the IRS, CRA, and individual states and provinces are available to help innovative startups grow.
At the core of many of these government programs is job creation and the goal of growing the local economy and tax base.
Like many founders, you’re probably thinking about your business in terms of global impact—how your products and services can reach people worldwide, not just in your own backyard.
The challenge is that your access to government-backed funding programs ultimately depends on where your business is based. If your company isn’t tied to a single location, this could either complicate your incorporation process or open up new funding opportunities.
This becomes even more important as you look beyond government grants and tax credits to venture capital (VC) and other private funding sources.
While government funding is crucial at every stage of your startup’s journey, when you start seeking VC to accelerate your growth, you may need to rethink how and where your business is incorporated to maximize your access to capital.
Quick Recap: The Tax Benefits of a CCPC
For Canadian founders, incorporating as a Canadian-controlled private corporation (CCPC) comes with several key advantages. For example, early-stage startups can benefit from the Small Business Deduction (SBD), which offers a lower tax rate on the first $500,000 of active business income earned in Canada.
On top of that, CCPCs can typically recover about 64 percent of eligible salaries (compared to just 36 percent for non-CCPCs), as well as up to 32 percent of subcontractor fees and 42 percent of qualifying material costs through SR&ED (see this infographic for more details). Keep in mind that rates may vary slightly depending on where your company is incorporated in Canada.
There’s also the enhanced SR&ED Income Tax Credit (ITC), which—along with the SBD—lets CCPCs claim up to $3 million in qualifying R&D expenses. This means you can recover 35 percent of annual SR&ED ITC expenditures, compared to the standard 15 percent rate for non-CCPCs.
Benefits of Incorporating in the United States
Given the generous tax credits and grants available to CCPCs, it’s understandable to be cautious about giving up CCPC status if it’s been working well for your company.
However, from the perspective of potential investors—especially U.S.-based VCs with significant resources—incorporating in the U.S. can make it much easier to do business.
This is especially true when it comes to managing taxes—filing in multiple countries means more paperwork—and dealing with uncertain market conditions. Lending markets are tight, and VCs are particularly cautious about tech investments after recent bank failures. Many VCs simply feel more comfortable investing in companies incorporated in the U.S.
Many U.S. VCs are also unfamiliar with the Canadian tax system and may not want to take on the extra due diligence required to comply with foreign regulations. By choosing a corporate structure that offers predictability in terms of taxes and compliance, you can make your business more attractive to VCs who don’t want to navigate unfamiliar tax codes.
Why Delaware?
That’s why many VCs specifically prefer Delaware as the go-to location for incorporating their portfolio companies. While this might seem like a very specific request, it’s backed by nearly 200 years of legal precedent.
Delaware’s Court of Chancery has handled corporate disputes for decades, resulting in business-friendly policies and a highly predictable tax environment that’s easy for VCs to understand.
Best of all for VCs, incorporating as a Delaware C-Corp means shareholders are taxed separately from the company—a feature of C-Corps across the U.S. and CCPCs in Canada. Plus, Delaware offers strong legal protections for founders and board members, limiting their personal liability when making high-stakes business decisions.
You don’t need to physically operate in Delaware to incorporate there. All a C-Corp needs is a Registered Agent in the state to serve as a liaison with state officials, allowing shareholders and founders to benefit from Delaware’s liability protections.
What to Consider Before Changing Your Incorporation Status
Ultimately, your business is unique, and your capital strategy should align with your specific goals and roadmap.
If you’re still in the early stages, developing your products and services, the tax credits and grants you receive as a CCPC may be too valuable to risk by changing your incorporation status. Programs like SR&ED, IRAP, and others could be funding a large part of your R&D, so it might make sense to wait until you’ve reached a higher level of technological maturity before seeking VC investment.
It’s crucial to know exactly which tax credits and grants you qualify for as a CCPC, and to calculate what you’d lose if you give up that status.
This is especially important when considering U.S. R&D tax policy, since the federal R&D tax code is currently in flux. The 2017 Tax Cuts and Jobs Act (TCJA) introduced new amortization and capitalization rules under Section 174, which now prevent startups from expensing R&D costs in the year they’re incurred.
In short, your decision about where to incorporate should be based on how much of your funding will come from VCs versus government cash-back programs, and where it makes the most sense for you personally. After all, money isn’t everything—your team’s mission might be to strengthen your local economy while building innovative new products and services.
Whatever your priorities, having a complete, up-to-date picture of your R&D activities and your eligibility for tax credits and grants is the best way to weigh the pros and cons of your incorporation options.
Boast AI integrates seamlessly with your project and financial systems to give you a comprehensive view of your project status and tax position, so you can make the best decisions for your business. Book a call with our team today to learn more.
