CCPC (Canadian-controlled private corporation)

What the CRA actually tests

CCPC status is decided by a list of requirements applied at the end of the tax year. The corporation must be private and resident in Canada, and it must have been incorporated in Canada or resident here for the required period. It must not be controlled by non-residents, by public corporations, or by any combination of those, and none of its shares can be listed on a designated stock exchange.

The word control matters. The tests refer to control exercised directly or indirectly, so it is worth looking through holding companies and other intermediaries to see who really sits at the top. There is also a combination test: if shares held by non-residents or public corporations were all held by one person, that person must still not have enough shares to control the corporation.

Why the label matters

Several corporate tax rules depend on whether a corporation was a CCPC, and some depend on whether it was one throughout the year, at any time in the year or at year-end. The best-known benefit is the small business deduction, which is available to corporations that were CCPCs throughout the tax year. Status also affects some investment tax credit rules and other calculations on the T2 return.

The CRA warns that a change of corporation type can have significant tax consequences. Status is reported on the T2 return, so it is worth confirming rather than assuming.

An illustrative example

Suppose an Ontario consulting company is owned by two Ontario residents. Neither a public company nor a non-resident controls it, so it is generally a CCPC. Now suppose the owners sell 60% of the voting shares to a non-resident investor midway through the year. The company is then controlled by a non-resident, so it generally stops being a CCPC from that point, and it may lose the small business deduction for the whole year because that deduction needs CCPC status throughout. This example is illustrative, and real share structures and agreements can change the answer.

Common misunderstandings

A company being incorporated in Ontario or federally does not make it a CCPC by itself. A private company with a non-resident controlling shareholder is not one. Being a CCPC also does not guarantee the lower rate: the small business deduction still depends on the type of income earned, so investment income and personal services business income are generally excluded. See active business income and the small business deduction for that second layer.

Share issues, buy-outs, new investors and convertible instruments can all change control, so ownership changes are worth checking before they happen.

What to discuss with your accountant

Give your accountant the current shareholder register and any shareholder agreement, options or warrants. Mention shareholders who live outside Canada, and any plans to bring in investors or sell shares. Ask whether any related or associated corporations affect how the benefits are shared, since associated corporations share one business limit.