Tax Tips and Pits: Small businesses and the CCPC tax deduction

"...without this small business tax break a small business owner would remit nearly double in tax."

Oh those darn corporations and their tax breaks.

But wait, before all corporations are tarred and feathered, perhaps some enlightenment about Canadian Controlled Private Corporations (CCPC) is warranted.

The definition.

If a corporation meets all of the following criteria, then it qualifies by Canada Revenue Agency (CRA) as a CCPC.  The corporation must be incorporated and resident in Canada, and not be controlled directly or indirectly by a non-resident, a publicly traded company, or a Canadian company that lists its shares on a foreign exchange.  And it must not have any class of its own shares traded on any stock exchange.

The break.

As a qualified CCPC, CRA allows a small business deduction applicable to the first $500,000 of gross active income – “active” meaning revenues generated by conducting business activities, not rental or investment income the business may be paid or earn.  By only allowing active income to qualify, the government ensures that the business is producing something for the economy.

The tax break comes in the form of a lower tax rate levied on the first 500k of revenue.  Rather than the normal 26% federal and provincial combined corporate tax rate, for a CCPC in BC the first 500k of active income is taxed at a rate of 13.5%, third in line to Saskatchewan’s 13% and Manitoba’s leading 11%.  In addition, BC’s tax rate applicable to revenue above 500k is among the lowest of all provinces at 22%.

The benefit.

Arguably, the lower CCPC tax rate is not only good for small businesses everywhere in Canada but the ranking of BC’s tax rates relative to the rest of Canada makes for favourable business activity and growth in BC itself.

Perhaps more to the point, without this small business tax break a small business owner would remit nearly double in tax.  Instead, the additional cash left in the business yields the opportunity for expanding the business, or in some years it’s the difference between remaining open or closing – a stark reality for far too many businesses.

In addition to the business tax break for a CCPC, there are also tax advantages for the shareholders of the company.

One of these tax advantages is that a CCPC can pay dividends to the shareholders that are more favourably taxed than wages, although this tax advantage has recently been reduced by government.

Another tax advantage occurs upon the sale of a CCPC.  The CCPC shares qualify under the lifetime capital gains exemption so when the owner sells, up to half of $800,000 in capital gain – his or her blood, sweat and tears if you will – is tax free, available for spending, investing and maybe even retiring.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.

Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.