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:
- 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
- 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:
- is not a “public corporation”, and
- 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.
