In Canada, there are different types of corporations for tax purposes.
Canadian Controlled Private Corporations (CCPC) enjoy lower income tax rates on corporate profits because of small business deduction. In order to qualify for the CCPC status, certain requirements need to be met. For example, the control of the corporation should not be with a non-resident or public corporation.
Word of Caution: When a corporation changes its status from a CCPC to another type or vice versa, this has material tax consequences. Unless you are a seasoned tax professional or a Chartered Accountant in Canada, you are recommended to consult your corporate income tax accountant in Canada. This post is for general information purpose and readers are cautioned to apply this to their particular corporate tax situation.
Losing CCPC Status for the Corporation
A Canadian Controlled Private Corporation (CCPC) can lose the CCPC status, most commonly, in below two scenarios:
- The control of the corporation is not with the residents of Canada.
- The control of the corporation is moved to any public corporation, Canadian or Non-Canadian
Many businesses in Canada operate as Corporations. These corporations can keep on enjoying lower tax rates being CCPCs as long as the control is with the residents of Canada. So, when a sole shareholder or the shareholder having control emigrate from Canada, the corporation stops being a CCPC.
If you recently emigrate from Canada or planning to leave Canada while having a Corporation, discuss this with your personal income tax consultant.
Important Considerations for Change in CCPC Status of a Corporation
As mentioned earlier, changing a CCPC status have material tax consequences and must be planned in advance.
Deemed Tax-year end for the Corporation
Subsection 249(3.1) of the Income Tax Act of Canada provides that the fiscal year of the corporation is deemed to end immediately before the date the CCPC lost its status.
When a corporation loses its CCPC status, it is required to file the income tax return for the deemed tax-year immediately ended before that date. The date of change of control becomes the date the corporation gained the new tax status. This date also marks the beginning of the new fiscal year. A corporation can choose any tax-year end within the next 53 weeks from this date. A minister’s approval for the change of fiscal year is not required in this situation.
A corporation income tax return for a corporation which is a CCPC is generally due within six months after its fiscal year-end. Moreover, any tax due must be paid within three months of tax year-end of a CCPC. All the late filing penalties and interests are applicable for non-compliance. Depending on the new tax status, corporation due date for filing income tax returns and making income tax payments will also be affected.
For example, if the CCPC had a year-end of December 31 it filed corporate income tax return T2 for the FY ending Dec 31, 2019 (A). On May 01, 2020, the sole shareholder changed its residency status to a non-resident of Canada (B). The corporation must file its corporate income tax return within 6 months for the period ending April 30, 2020. From May 01, 2020, a new fiscal year is started and the corporation can choose any date within the next 53 weeks. It can choose Dec 31st or April 30th of next or any other date within 53 weeks.
Small Business Deduction (SBD) for Short Tax Year
When a tax year of a corporation is deemed to have ended, it results in a short tax year. While filing the income tax return for this short year, Small business deduction ($500,000 for one year) is also pro-rated. This can result in some income being taxed at higher income tax rates.
Please note that small business deduction is only available to CCPCs, your new corporation tax status will not eligible for SBD.
Shareholders’ Account Balances
This is quite normal to have “due from shareholder” balances on the balance sheet of a CCPC. Loans to shareholders or amounts receivable from shareholders have certain rules. Due to a short tax-year, an additional tax year-end is added that needs careful consideration.
Business Losses and Foreign Tax Credits Carryforwards
Business losses and unused foreign business income tax credits are carried forward for a certain number of years. Again, due to additional tax year-end, these carryforwards may expire earlier than they would be if the corporation continued to be a CCPC.
Investment Income of CCPCs
Earning investment income through a CCPC has its own rules. Since the corporation is not a CCPC anymore, so investment income is taxed at a lower rate and no further refundable dividend tax credits are accumulated.
Eligibility to claim ABIL
Allowable Business Investment Loss (ABIL) is available to shareholders for eligible small business corporations only. If you are a shareholder who is planning to become a non-resident of Canada and have loans to CCPCs or shares of CCPCs that are worthless, plan to claim ABIL on them before leaving Canada.
Crystalize Lifetime Capital Gain Exemption
Lifetime Capital Gain Exemption (LCGE) is available for generating exempt capital gains on the sales of qualified small business corporation shares in Canada. In 2019, LCGE limit was $866,912. If your corporation loses CCPC status because you have become a non-resident of Canada, it affects your eligibility to claim LCGE.
Extra Reporting Requirements in Future
When your corporation loses its CCPC status, new tax status and tax situation resulting because of non-resident shareholders may give rise to new reporting requirements. Depending on your situation, the corporation may need to withhold taxes from payments to non-resident shareholders (including dividends).
If you are planning to emigrate and holding shares of qualified small business corporations, you can crystalize the capital gains by planning ahead.
Maroof HS CPA Professional Corporation is a professional accounting firm registered with CPA Ontario and Alberta, providing a wide range of Corporate income tax services in Canada.
If you are planning to emigrate from Canada or immigrate to Canada, and have Canadian Corporations, you can utilize our services to properly plan your personal and corporate income tax issues. Get in touch with us and let us know how can we help you.