Effects of Losing CCPC Status for Canadian Corporations

In Canada, corporations are categorized differently for taxation. The Canadian Controlled Private Corporations (CCPC) benefit from reduced income tax rates on their profits, thanks to the small business deduction. To be eligible for CCPC status, specific criteria must be satisfied. Notably, the corporation shouldn’t be controlled by a non-resident or a public entity. 

Cautionary Note: Transitioning a corporation’s status from a CCPC to another kind or vice versa has significant tax implications. Unless you’re an expert in Canadian taxation or a Chartered Accountant, it’s advisable to consult a corporate income tax accountant in Canada. This article is for informational purposes, and readers should tailor this information to their specific corporate tax situations. 

How a Corporation Might Lose CCPC Status: A CCPC can lose its status primarily in two situations: 

• The corporation is no longer controlled by Canadian residents. 
• The corporation’s control is transferred to a public entity, whether Canadian or foreign. 

Many Canadian businesses function as Corporations. They continue to benefit from the lower tax rates of CCPCs as long as they remain under the control of Canadian residents. However, if the controlling shareholder or the sole shareholder relocates from Canada, the corporation ceases to be a CCPC. If you’re considering leaving Canada and own a Corporation, it’s crucial to discuss this with a tax consultant. 

Key Points to Consider When CCPC Status Changes: 

• Deemed Tax-year End: According to Subsection 249(3.1) of the Income Tax Act of Canada, when a corporation loses its CCPC status, its fiscal year is considered to have ended just before the date of status loss. The corporation then has to file an income tax return for this deemed tax year. The date of control change marks the start of the new fiscal year, and the corporation can select any tax-year end within the subsequent 53 weeks. 

• Small Business Deduction for Short Tax Year: If a corporation’s tax year is deemed to have ended, it results in a short tax year. The Small Business Deduction, typically $500,000 annually, is prorated for this period. This might lead to some income being taxed at higher rates. 

• Shareholders’ Account Balances: Balances due from shareholders on a CCPC’s balance sheet have specific regulations. The introduction of an additional tax year-end requires careful consideration. 

• Business Losses and Foreign Tax Credits: Business losses and unused foreign business income tax credits can be carried forward for a set number of years. An additional tax year-end might cause these carryforwards to expire sooner. 

• Investment Income: Investment income rules differ for CCPCs. Once a corporation is no longer a CCPC, its investment income is taxed at a reduced rate, and no more refundable dividend tax credits are accumulated. 

• Eligibility for ABIL: The Allowable Business Investment Loss (ABIL) is available only to shareholders of eligible small business corporations. If you’re a shareholder considering becoming a non-resident of Canada, it’s essential to plan for ABIL claims before departure. 

• Lifetime Capital Gain Exemption: This exemption is available for capital gains from the sale of qualified small business corporation shares in Canada. If a corporation loses its CCPC status due to the shareholder becoming a non-resident, it impacts the eligibility for this exemption. 

• Future Reporting Requirements: Losing CCPC status might introduce new reporting requirements, especially if there are non-resident shareholders. Depending on the situation, the corporation might need to withhold taxes from payments made to these shareholders.