Accurately defining the nature of your business is critical. While this can take many forms—like identifying early-stage vs. late-stage qualities for Venture Capital scoping, or even characterizing your organization based on your product’s Technology Readiness Level—the Canadian Revenue Agency identifies five different corporation types to designate the various tax-filing organizations:
- Canadian-controlled private corporations (CCPCs)
- Other private corporations
- Public corporations
- Corporation controlled by a public corporations
- Other corporations
This first designation—CCPC—warrants unpacking, as businesses that meet CCPC criteria can potentially take advantage of a wealth of support from the Canadian federal government and provinces. Specifically, CCPCs qualify for valuable tax deductions, which are awarded based on active businesses income, as well as tax credits. This includes (though certainly isn’t limited to) Canada’s banner Scientific Research & Experimental Development (SR&ED) tax credit.
What is a CCPC?
The simplest way to look at a CCPC is that it’s a fully private corporation that’s either created in Canada or “resident” on Canadian soil from June 18, 1971 (per the Income Tax Act) through the applicable tax year. Additional key qualifications include:
- The business is not controlled—even indirectly—by one or more non-Canadian residents
- No public corporations—other than a prescribed Venture Capital corporation, per Regulation 6700—has direct or indirect control over the corporation
- No controlling parties lists the corporation’s shares on a designated stock exchange outside of Canada
- To that end, no class of shares or capital stocks for the organization are listed on any stock exchange
What are the tax benefits of a CCPC?
The primary advantage that businesses gain by qualifying for CCPC is the Small Business Deduction (SBD). This benefit provides a preferential deduction rate on the first $500,000 in active business income a CCPC accrues in Canada.
The total deductions are calculated via the T2 Corporate Income Tax form that businesses file at the end of each fiscal year. While actually navigating the application itself can be tricky and laborious, the deductions are determined by multiplying the deduction rate by the corporation’s 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), respectively. The lowest total of these four calculations is then plugged into line 430 and considered the deductions for that tax year.
Of note: An additional refundable tax rate of 10.67 percent is also imposed on a CCPC’s aggregate investment income, which is intended to remove tax deferral advantages that individuals may attempt to reap when claiming investment income as a CCPC (rather than in their personal filing).
CCPC & SR&ED, other tax benefits
As a baseline, CCPCs can claim up to 64 percent of recoverable amounts on qualifying expenditure as they relate to salaries, versus only 36 percent for non-CCPCs. Additionally, CCPCs can recover up to 32 percent of subcontractor fees and 42 percent of materials costs that qualify for SR&ED (see this infographic to learn more).
There’s also the enhanced SR&ED Income Tax Credit (ITC) that, along with enjoying the SBD, CCPCs can leverage on upwards of $3 million worth of qualifying research and development expenditures. This plays out at 35 percent of annual SR&ED ITC expenditures, opposed to a 15 percent standard rate for non-CCPC organizations.
The “expenditure limit” is capped at $3 million if the “taxable capital” (aka revenue) is less than $10 million for a CCPC in the prior taxation year. That said, this limit begins to phase out after revenue crosses the $10 million threshold, with the expenditure disappearing completely as taxable capital reaches $50 million.
Additional CCPC benefits include:
- The ability to defer the recognition of employee stock options
- A shorter reassessment period of three years (opposed to the standard four)
- For CCPCs that claim the SBD, an extra month (three instead of two) to pay any balance owed
- Quarterly corporate tax payments (opposed to monthly) for small CCPCs.
How to qualify
When you’re incorporating your business, you’ll inevitably need to navigate additional criteria on the path to gaining your CCPC designation, depending on where exactly in Canada your founders and operations are based.
Where being a CCPC becomes an asset, however, is when you’re filing your annual income taxes. By partnering with tax professionals that can seamlessly navigate the government forms and financial data that’s key to your T2 filing, you have a better chance of maximizing your returns and extending your CCPC’s runway.
Best of all, Boast has an unmatched track record of defending claims in the face of audits or reassessments, allowing you to rest assured that your filing is not just maximized, but taken care of.
Boast brings a complete solution to maximize your tax incentive claims and eliminate the difficulty and mystery of traditional offerings. Boast securely integrates with hundreds of other systems to make capturing and qualifying your SR&ED investments easy, and real-time. Request a demo with the team today to get started.
