“it is important to plan in advance.”
There are a number of tax implications to consider when a Canadian Controlled Private Corporation (CCPC) becomes a non-CCPC (for example, because its controlling shareholder becomes non-resident, or because it is taken over by a public company). The following is a brief discussion of important considerations.
There will be a deemed year-end immediately before the change in status occurs, and a new taxation year-end will be deemed to begin immediately after the change in status. If this point is not noticed and a corporation income tax return is not filed within six months of the deemed year-end (and the balance owing is not paid by the deadline, which is normally three months after the deemed year-end), penalties and interest may apply.
The “extra” year can accelerate the expiry of carryforwards such as business losses and foreign tax credits. Loans to shareholders and unpaid amounts may have to be repaid sooner than they otherwise needed to be, to avoid adverse tax consequences. The $500,000 income threshold for the small business deduction will be prorated for the “short” year, with the result that some income might be subject to high corporate tax rates. After the change of status, of course, the small business deduction will not be available.
The loss of CCPC status will normally mean that the $750,000 capital gains exemption cannot be claimed in the future on the sale of shares of the company. If a change of status for a CCPC is being contemplated, the shareholders may want to “crystallize” their capital gains exemptions, with a disposition that will allow them to use the exemption before it becomes unavailable. Similarly, an allowable business investment loss (ABIL) is not available on a loan to, or shares of, a non-CCPC. Where appropriate, consider restructuring to claim an ABIL before CCPC status is lost.
Loss of CCPC status may also reduce entitlement to the scientific research and experimental development (SR&ED) investment tax credit.
The effective tax rate on investment income will decrease from 47.67% (in Ontario) to 30% when the corporation becomes a non-CCPC. This tax reduction is due to the removal of refundable tax mechanism applied to CCPCs. Previous RDTOH is not lost but no additional RDTOH will accumulate.
The general rate income pool (GRIP) that produces lower rate taxable dividends is only available to CCPCs. After a change of status, GRIP dividends can no longer be paid and earnings will accumulate in a low rate income pool (LRIP). In the first year following the change in status to a non-CCPC, any remaining GRIP balance may be deducted from any opening LRIP balance that may have existed. Any excess eligible dividends paid will be subject to an excessive designation penalty tax.
This Tax Tip does not provide an exhaustive list of issues. It should be clear, however, that it is important to plan in advance if a corporation is going to lose its status as a CCPC.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.