Breaking down Canadian Controlled Private Corporation tax rates

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

SMALL BUSINESS CORPORATIONS

If a corporation meets all of the following criteria, then it typically qualifies by Canada Revenue Agency (CRA) as a Canadian Controlled Private Corporation (CCPC).

The corporation must be resident in Canada and not controlled 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 shares traded on any stock exchange.

If a corporation qualifies as a CCPC, CRA allows a small business limit of $500,000 of after expense active income. “Active” meaning, income generated through active business operations.

The tax rate levied on this first $500,000 of active income is reduced to 12 per cent in BC from the normal 27 per cent, an incentive by federal and provincial governments to encourage business development. Active income over $500,000 is taxed at regular corporate rates.

Realizing that this favourable tax rate applies to active income earned by the CCPC, what about “passive” income earned from an investment portfolio held by a CCPC?

Given the fact that the CCPC designation itself exists because government chooses to stimulate the economy, then it’s apparent that a CCPC engaged in producing significant passive income rather than focused on producing products and services isn’t necessarily aligned with the government’s intention.

In addition, if CCPC passive income were taxed at the 12 per cent active income rate, it’s obvious that a CCPC shareholder, in other words the owner, would have a tax advantage over a sole individual investor who would be subject to personal tax rates of up to 50 per cent.

As such, the taxes paid by a CCPC are adjusted due to passive income earned, but only on the incremental amount of passive income over $50,000.

Often referred to as a “grind-down” tax policy, for every dollar of CCPC passive income earned that exceeds the $50,000 threshold, there is a $5 lowering of the $500,000 CCPC small business income limit.

For example, if a CCPC earns $90,000 of passive income in a fiscal year, the CCPC’s small business income limit lowers to $300,000. The math is $90,000 less the $50,000 allowable threshold x $5, so this means $40,000 x $5 equalling $200,000 deducted from the normal $500,000 CCPC small business income limit.

To the extreme, once passive income earned reaches $150,000, the CCPC small business income limit is zeroed, eliminating the lower CCPC tax rate advantage.

The reduced income limit is applied the following fiscal year.

Why is there a $50,000 passive income threshold? CRA permits a CCPC to hold wealth and earn this amount of investment income annually to acknowledge financial needs required for business expansion, and planning for the unexpected.

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.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Jumbo Valley to be protected, ending decades-long dispute over proposed ski resort

Development rights permanently retired for site of proposed year-round ski resort west of Invermere

Trust delivers social grants, several in Trail and Rossland

Columbia Basin Trust supports 31 projects with $680,000 in social grants

FedEx distribution centre coming to Castlegar

Development permit for ground facility before council next week.

Kootenay teams heading for curling provincials

Team Buchy and Team Nichols won the senior playdowns.

‘Like an ATM’: World’s first biometric opioid-dispensing machine launches in B.C.

First-of-its-kind dispensing machine unveiled in the Downtown Eastside with hopes of curbing overdose deaths

Horgan cancels event in northern B.C. due to security concerns, says Fraser Lake mayor

The premier will still be visiting the city, but the location and day will not be made public

B.C. landlord sentenced to two years in jail for torching his own rental property

Wei Li was convicted of intentionally lighting his rental property on fire in October 2017

PHOTOS: Eastern Newfoundland reeling, search underway for missing man after blizzard

More than 70 centimetres of new snow fell overnight, creating whiteout conditions

Prince Harry, Meghan to give up ‘royal highness’ titles

‘Harry, Meghan and Archie will always be much loved members of my family,’ says Queen Elizabeth II

Calls for dialogue as Coastal GasLink pipeline polarizes some in northern B.C.

Coastal GasLink is building the 670-kilometre pipeline from British Columbia’s northeast to Kitimat on the coast

Closed mills, housing surge support a positive forecast for lumber industries

B.C. lumber producers have closed mills accounting for 18% of province’s capacity, RBC report says

Good Samaritan pays part of rent for B.C. woman facing eviction in can-collecting dispute

Zora Hlevnjak, 76, supplements her pension by collecting cans and receiving public donations

Kelowna’s ‘Baby Mary’ finds biological parents after more than 30 years

Geneologist and DNA test helped her connect with her biological parents

Most Read