A Canadian-controlled private corporation ("CCPC") that earns investment income is subject to a refundable tax regime. The CCPC pays a higher corporate tax upfront (around 50% depending on the province), but part of the corporate tax is fully refundable to the corporation to the extent that the CCPC pays sufficient non-eligible taxable dividends to their shareholders. The purpose of the refundable tax regime is to prevent individuals from deferring tax simply by moving their liquid assets into a CCPC and benefiting from general corporate rates, which is approximately half of the personal tax rate at high income brackets.

Over the years, some taxpayers have tried to circumvent the refundable tax regime by intentionally preventing a corporation from qualifying as a CCPC (so-called non-CCPC planning). One common approach may involve incorporating a corporation in a jurisdiction outside of Canada with no "treaty tie-breaker" rules, such as the British Virgin Islands (BVI). As a result of such planning, the corporation may avoid CCPC status by falling offside the CCPC definition, while also remaining resident in Canada by virtue of its mind and management remaining in Canada. Therefore, even though the corporation pays Canadian income tax on all its income, the CCPC would be able to earn investment income with a tax-deferral advantage, since it would no longer be subject to the refundable tax regime.

In classic cat-and-mouse fashion, the Government changed the rulebook in 2022 to prevent this type of planning. First, on February 4th, 2022 the Government introduced the notifiable transactions proposals and made non-CCPC planning one of the six proposed notifiable transactions whereby taxpayers and their advisors essentially have to self-confess within 45 days of undertaking a transaction that involves 'manipulation' of the CCPC status. Then, on the April 7th 2022 Federal Budget, the Government put the final nail in the coffin by introducing the "Substantive CCPC" rules. The details of the Substantive CCPC rules are still forthcoming, but the new legislation is expected  to impose the refundable tax regime on any private corporation that is legally or factually controlled by Canadian-resident individuals. By one stroke of the legislative pen, all tax benefits previously enjoyed by non-CCPCs earning investment income, disappears.

In light of this development, some taxpayers with non-CCPCs are thinking about unwinding their structure even though the full details of the Substantive CCPC rules have not yet been announced. They can unwind the structure by brute force, i.e., removing all the investment assets from the Non-CCPC and subsequently winding up the non-CCPC entity. This could be the easiest solution in some cases, but there is likely going to be a significant taxable gain recognition to the extent the non-CCPC has built up a material amount of retained earnings and/or unrealized gains in its assets.

For some, a less costly solution may be to convert a non-CCPC back to a CCPC by continuing the corporation back to Canada.  

A corporation may apply to file Articles of Continuance in Canada under the relevant federal, provincial and territorial statutes. Depending on the province or territory of application, a legal opinion from the non-Canadian jurisdiction may be required. For most jurisdictions, the appropriate name search reports will be required. Once the Certificate of Continuance is obtained, the corporation can likely apply for discontinuance in the foreign jurisdiction, subject to their laws. Where the corporation's jurisdiction is BVI, the corporation can generally be discontinued by obtaining a certificate of discontinuance issued by the BVI Registry.

Following discontinuance, the corporation retains the same legal personality and obligations. Specifically, the corporation continues to be liable for its obligations in existence prior to discontinuation, and any pending or current proceedings by or against the corporation remains unaltered. However, from a BVI perspective, the corporation will no longer be subject to BVI company law once a certificate of discontinuance is issued. Service in respect of any claim, debt, liability or obligation arising prior to discontinuation will continue to be effected on the corporation's BVI registered agent.

From a Canadian tax perspective, the continuance into Canada should generally not result in any deemed or actual disposition since there is no tax residency change on the continuance, and the entity remains a corporation before and after. The CCPC will continue to pay income tax on its business income as it had as a non-CCPC but is now subject to the refundable tax regime on its aggregate investment income. The change in status from non-CCPC to CCPC would result in a deemed tax year end, and a computation that converts the entity from the LRIP to the GRIP regime.

This appears to be the end of the non-CCPC story... at least until someday, someone might figure out how to "manipulate" the new Substantive CCPC rules to their advantage thus continuing the inevitable cat-and-mouse game!

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