Small business tax policy is under scrutiny. This is tax policy regulating Canadian Controlled Private Corporations (CCPC), not proprietorships. Some “loopholes” do exist, others may be perceived.
With this introduction in mind, a key component of CCPC tax policy is the lower tax rate applicable to the first $500,000 of income earned by a CCPC. This income is taxed at 12 per cent in BC rather than the standard corporate rate of 27 per cent on amounts over $500,000.
For the ever creative entrepreneur with CCPC income exceeding $500,000, it may make sense to split the business into separate components each operated by a separate CCPC so that each CCPC could take advantage of the $500,000 exemption.
Or there’s the option to start a completely unrelated business as a separate CCPC?
Sounds like a $500,000 exemption for each CCPC owned by the entrepreneur.
Sounds like a plan!
No can do.
Canada Revenue Agency (CRA) defines these businesses related through common ownership as “associated companies” and only permits one cumulative $500,000 income exemption.
So this is not a loophole.
The rule is quite complex. However, here are the three most common relationships that define associated companies.
The first: CCPC “A” controls CCPC “B”, or vice versa.
The second: A and B are owned by the same person or group of people.
And the third: A and B are each owned by separate people, but the people are related and one of them owns 25 per cent or more of the other company.
By definition then, with this third example a couple could each solely own their own CCPC and each be allowed the $500,000 exemption, as long as neither of them owns more than 25 per cent of the other’s company.
Sounds like a loophole.
Not really if CRA does it job.
CRA has the authority to look beyond technical ownership. CRA can investigate how these businesses are actually being operated. If CRA concludes that the corporations are designed simply for tax avoidance, the CCPCs will be deemed “associated” and only one $500,000 exemption permitted.
How is this determination made?
Often this comes down to the control of the companies. Control in its truest sense refers to legal control. However, control can be “de facto”. That is, control by influence and not by technical ownership of the majority of shares of the CCPC – a measured definition by the Tax Court of Canada. A key component to this determination is the identification of who actually is the decision maker of any particular corporation and the relatedness of the people through blood or marriage who own the corporations in question.
Rules are in place. Some latitude is available. CRA enforcement is key.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him atron. clarke@JBSbiz. ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.