When you decide to start a business in Canada, you have multiple alternatives when it comes to structuring your business. One possibility is to establish a corporation, and in Canada, there are numerous options available to choose from.
Creating a corporation can be advantageous due to various reasons such as enhanced credibility and reduced liability. One primary rationale for opting for a corporation is that the tax treatment for Canadian corporations differs from that of other business forms. A corporation is considered a distinct legal entity, and its tax obligations are separate from those of the individual.
Outlined below are the various types of corporations that you can set up in Canada, along with the necessary requirements for establishing each type.
Canadian-Controlled Private Corporation
As the name implies, a Canadian-controlled private corporation has to be private. It also has to meet all of the following conditions:
It is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year
It is not controlled directly or indirectly by one or more non-resident persons
It is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
It is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
It is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
It all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
No class of its shares of capital stock is listed on a designated stock exchange, for example, the Toronto Stock Exchange (TSE).
Changes in share ownership have the potential to result in the corporation no longer being considered a CCPC. An example of this would be if certain shareholders became non-residents or if shares were sold to non-residents, leading to non-residents controlling more than 50% of the voting rights. In such a scenario, the corporation would lose its eligibility as a CCPC.
From a tax perspective, there are several advantages for Canadian-Controlled Private Corporations (CCPCs). Besides the small business tax deduction, CCPCs benefit from enhanced investment tax credits, capital gains exemptions for shareholders when selling shares, and research and development tax credits for qualifying activities.
Other Private Corporation in Canada
This type of corporation also has to be a resident in Canada and be private. It must also meet all of these conditions:
It is not controlled by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
It is not controlled by one or more prescribed federal Crown corporations (as defined in Regulation 7100); and
It is not controlled by any combination of corporations described in the two previous conditions.
Public Corporation in Canada
A public corporation is a term used for a company that has a particular type of shares listed on a specific stock exchange in Canada. However, it has the option to either be considered or officially designated as a public corporation according to Regulation 4800(1) of the Income Tax Regulations. Conversely, if a public corporation fulfills specific requirements outlined in Regulation 4800(2) of the Income Tax Regulations, it can choose not to be recognized as a public corporation.
Control by a Public Corporation in Canada
This corporation is a Canadian branch of the above-mentioned public corporation. However, it is not categorized as a public corporation when submitting the T2 Corporation Income Tax Return.
Any corporation that does not fall into the mentioned categories is referred to as an “other corporation.”
Choosing Your Corporation Type in Canada
Setting up a sole proprietorship or a partnership may be simpler and more cost-effective, but opting for a corporation provides greater protection against liability and enhances credibility. Moreover, if you decide to establish your small business as a corporation in Canada, it is worthwhile contemplating a Canadian-controlled private corporation due to the tax benefits it offers. However, the additional expenses and paperwork associated with incorporating often prompt businesses to delay the process until their annual revenue reaches $50,000.
Need more information? CBES is here to assist you; feel free to contact us for expert guidance.