Canada: Principal Differences In The Tax Treatment Of "Public Corporations", "Private Corporations" And "Canadian-Controlled Private Corporations"

Last Updated: February 7 2013
Article by Michael Platt and Ken Snider

Introduction

Under the Income Tax Act (Canada) (the “Tax Act”), the status of a corporation as a “public corporation”, “private corporation” or “Canadian-controlled private corporation” (“CCPC”) (as each term is defined in the Tax Act) can affect the tax treatment of the corporation and its shareholders in a wide variety of circumstances and transactions, including mergers and acquisitions and investments.

This bulletin provides a high-level summary of: (i) the meaning of the terms "public corporation", "private corporation" and “CCPC” under the Tax Act, and (ii) the principal differences in the tax treatment of a “public corporation", "private corporation" and “CCPC”.

“Public Corporation”, “Private Corporation” and “CCPC” – Defined

In very general terms, a public corporation means a corporation that is resident in Canada that has:

  1. a class of shares listed on a “designated stock exchange” (as defined in the Tax Act) in Canada (which includes the TSX, Tier 1 and Tier 2 of the TSX-V and the CNSX, but does not include the NEX); or
  2. elected to be a “public corporation” or has been designated as a “public corporation” by the Minister of National Revenue and complies with certain prescribed conditions, including the number of its shareholders, the dispersal of ownership of its shares, and the public trading of its shares.

Although a class of shares of a corporation may be publicly-listed (e.g. on the NEX), such a corporation is not necessarily a “public corporation” under the Tax Act. 

In general terms, a “private corporation” means a corporation resident in Canada that:

  1. is not a “public corporation”, and
  2. is not controlled (i.e., under the de jure test) by one or more “public corporations” (other than a “prescribed venture capital corporation” as defined in the regulations to the Tax Act) or “prescribed federal Crown corporations” (as defined in the regulations to the Tax Act), or any combination thereof.

In addition to distinguishing between “public corporations” and “private corporations”, the Tax Act distinguishes between “private corporations” and “CCPCs”.  In general terms, a “CCPC” means a “private corporation”  that is a “Canadian corporation” (as defined in the Tax Act) and also that is not controlled (i.e., under either the de jure or de facto tests) by non-residents, “public corporations”, or by any combination thereof.  The definition of “CCPC” does not require control by Canadian residents, but rather requires a lack of control by non-residents of Canada.  For example, a “private corporation” that is owned 50% by non-residents of Canada and 50% by residents of Canada qualifies as a “CCPC”. 

In addition, for the purposes of the “CCPC” definition, the Tax Act provides certain rules that deem certain rights in respect of the shares of a corporation to be exercised. These rules can result in a corporation losing its status as a “CCPC” subject to certain important exceptions.

A corporation may be neither a “private corporation” nor a “public corporation”. For example, a corporation that is resident in Canada, but that is an unlisted subsidiary of a TSX-listed corporation is neither a “public corporation” nor a “private corporation”.

Under the Tax Act, if a “public corporation” and a “private corporation” amalgamate, the resulting corporation is deemed to be a “public corporation”.

Elections Relating to “Public Corporation” Status

The Tax Act allows certain corporations that are not “public corporations” to file an election to be a “public corporation” and also allows certain “public corporations” to file an election to cease to be a “public corporation”. A corporation that is not a “public corporation” that satisfies certain conditions may file an election to be a “public corporation” to obtain certain tax benefits that would not otherwise be available. A “public corporation” will often file the election to cease to be a “public corporation” following its take-over to obtain certain tax benefits that would not otherwise be available.

A discussion on these elections is beyond the scope of this bulletin; however, a bulletin exclusively discussing these elections will be distributed in the near future.

Tax Benefits Available to a “Public Corporation”

Below are a few examples of certain tax benefits that may be available to a “public corporation”, but not to a “private corporation”:

  • Generally, the shares of a “public corporation” are "qualified investments" (as defined in the Tax Act) for registered plans, including registered retirement savings plans, registered retirement income funds, and tax-free savings accounts; however, the shares of a “private corporation” are only “qualified investments” in certain limited circumstances.
  • The Tax Act provides a favourable rule for a specific type of corporate reorganization for “public corporations” that is not available to a “private corporation”. 
  • Generally, a “public corporation” will not be subject to an additional tax (i.e. refundable Part IV Tax) on certain dividends received by it from “taxable Canadian corporations” (as defined in the Tax Act), or the refundable 6?% tax payable by a “CCPC” in certain circumstances.

Two unfavourable tax implications applicable to “public corporations” is the lack of integration of corporate and shareholder taxes in respect of certain investment income and a payment on a reduction of “paid-up capital” (as defined in the Tax Act) (“PUC”) is deemed to be a taxable dividend unless certain exceptions apply.

Tax Benefits Available to a “Private Corporation”

Below are a few examples of certain tax benefits that may be available to a “private corporation”, but not to a “public corporation”:

  • A “private corporation” may generally return PUC to its shareholders without it being deemed to be a dividend. 
  • There is “integration” of corporate and shareholder tax in respect of certain investment income and gains. For example, a “private corporation” has a “capital dividend account” (as defined in the Tax Act) that includes the non-taxable half of capital gains and can elect to treat dividends paid out of this account as capital dividends, which are received tax-free by Canadian resident shareholders, subject to detailed rules under the Tax Act.
  • A “private corporation” will not be subject to Part VI.1 Tax on dividends received by it on “taxable preferred shares” (as defined in the Tax Act).

As set out above, one unfavourable tax implication in certain situations that results from a corporation’s status as a “private corporation” is that the shares of a “private corporation” will only be “qualified investments” in certain limited circumstances.

Tax Benefits Available To A “CCPC”

In addition to the tax benefits that may be available to a “private corporation”, the following tax benefits may also be available to a “CCPC”: 

  • A “CCPC” may be eligible for a lower effective tax rate on its first $500,000 of active business income. Currently, the combined Federal/Ontario tax rate on the first $500,000 of active business income earned by a “CCPC” is 15.5% whereas the combined Federal/Ontario tax rate on all active business income earned by a non-“CCPC” is 26.5%.  
  • In order for an individual shareholder to qualify for the capital gains exemption on the sale of the shares of a corporation, one of several requirements that must be satisfied is that the shares must be of a “CCPC”.
  • The Tax Act provides a number of favourable rules for employee stock options issued by “CCPCs”, including the timing of the taxation of the employment benefit to the employee. For example, the taxation of the benefit is deferred until the employee disposes of the subject shares whereas the benefit to an employee of a “private corporation” is taxed at the time the employee exercises the stock option. Furthermore, the rules under the Tax Act that allow the employee benefit to be taxed at capital gain rates are more lenient for employees of a “CCPC” than employees of a “private corporation” or a “public corporation”.
  • A “CCPC” may be eligible for enhanced and refundable “investment tax credits” (as defined in the Tax Act), including the enhanced and refundable investment tax credit for qualified “scientific research and experimental development” (as defined in the Tax Act).

Practical Recommendations

As the status of a corporation has a significant impact on the taxation of a corporation and its shareholders, tax advice should be obtained anytime the status of a corporation may be of importance or may change. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Rotfleisch & Samulovitch P.C.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Rotfleisch & Samulovitch P.C.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions