Noh Review Taxation: Income From An Active Business of a CCPC

Today, we will discuss the topic of "Income from an active business of a CCPC."

First off, a CCPC is a Canadian-Controlled Private Corporation. Generally, it must meet the following conditions:

• It is a corporation resident in Canada, either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
• It is not controlled by non-resident persons;
• It is not controlled by public corporations;
• It is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;

Corporate Tax Planning Tips: When it comes down to incorporating your business, I want you to learn the different types of corporation. Each type of business may bring you some key tax advantages over others. For example, incorporating your business as a CCPC will bring you the following advantages:

• Eligible for the small business deduction, which applies to the first $500,000 of active business income
• Enhanced investment tax credits for qualified expenditures on SR&ED - this may be fully refunded. CCPCs can claim federal R&D credits at a rate of 35% to reduce corporate taxes, which is far better than a credit of 20% for other types of corporations.
• Shareholder entitlement to the $500,000 capital gains exemption on the disposition of qualified small business corporation shares. 
• If you exercise stock options granted by a CCPC, you can defer the employee's taxable benefit from it
• The basic rate of Part I tax is 38% of your taxable income, 28% after federal tax abatement. After the general tax reduction, the net tax rate is 15% effective January 1, 2012. For a CCPC claiming the small business deduction, the net tax rate is 11%.

So now you may be wondering, "what is the small business deduction?" The small business deduction represents a credit against the tax otherwise payable on income from an active business carried on in Canada, which is designed only for small CCPCs. A corporation must be a CCPC throughout the year to qualify for it.

In specific, the small business deduction is the least of:

a) Net Canadian active business income

b) taxable income fully taxed in Canada achieved by removing from the total taxable income, foreign-source income estimated

c) the business limit $500,000 less any portion allocated to associated corporations

Types of Business Which Are Ineligible for the Small Business Deduction:

• Now, what is the "active business" in tax? The definition of it is "any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade." 
• Income earned by a specified investment business or a personal services business does not qualify for the small business deduction.
• A specified investment business is a business whose principal purpose is to derive income from property (e.g. interest, dividends, rents, royalties) unless the corporation employs in the business throughout the year more than 5 full-time employees. 
  
• A personal services business is a business of providing services where an individual who performs services or anyone related to the incorporated employee is a specified shareholder or an owner of 10% or more of the shares of the corporation. The incorporated employee would reasonably be regarded as an officer or employee of the entity. This is unless the corporation employees more than 5 full-time employees throughout the year or the services are provided to an associated corporation.