When starting a business in Canada, you have a variety of choices in business structure. Creating a corporation is a popular choice, and Canada offers several alternatives for this purpose.
Opting for a corporation comes with numerous advantages, including enhanced credibility and reduced liability. Canadian corporations are subject to distinct tax regulations compared to other business forms. Additionally, a corporation is a separate legal entity that incurs taxes independently from individuals.
Here, we outline the available types of corporations in Canada along with the prerequisites for establishing each type.
Canadian-Controlled Private Corporation
A Canadian-controlled private corporation, as suggested by its name, must remain private and fulfill the following criteria:
1. It must be a corporation that was a resident of Canada and either incorporated in Canada or a resident of Canada from June 18, 1971, until the end of the tax year.
2. It must not be directly or indirectly controlled by one or more individuals who are not residents of Canada.
3. It must not be directly or indirectly controlled by one or more public corporations, except for a designated venture capital corporation as defined in Regulation 6700.
4. It must not be controlled by a Canadian resident corporation that has listed its shares on a designated stock exchange outside of Canada.
5. It must not be controlled by any combination of individuals described in the previous three conditions.
6. If all the shares owned by a non-resident person, a public corporation (excluding a designated venture capital corporation), or a corporation with shares listed on a designated stock exchange were owned by one person, that person would not possess enough shares to control the corporation.
7. None of its classes of capital stock are listed on a designated stock exchange such as the Toronto Stock Exchange (TSE).
Keep in mind that changes in share ownership may result in the corporation losing its status as a CCPC. For instance, if some shareholders become non-residents or non-residents acquire shares such that they control more than 50% of the voting rights, the corporation would cease to qualify as a CCPC.
From a tax perspective, Canadian-controlled private corporations (CCPCs) provide various corporate tax advantages. These include the small business tax deduction, enhanced investment tax credits, exemptions on capital gains for shareholders when selling shares, and tax credits for research and development activities that qualify.
Other Private Corporation
This kind of business must also be based in Canada and operate as a privately owned entity. Furthermore, it must fulfill the following criteria:
– It is not under the control of one or multiple publicly traded companies (excluding a designated venture capital corporation as defined in Regulation 6700.
– It is not under the control of one or multiple federally owned Crown corporations as specified in Regulation 7100.
– It is not under the control of any combination of corporations mentioned in the aforementioned conditions.
A publicly traded company is characterized by its shares being listed on a designated Canadian stock exchange. However, it has the option to be or be recognized as a publicly traded company under Regulation 4800(1) of the Income Tax Regulations. Nevertheless, if a publicly traded company satisfies specific requirements stipulated in Regulation 4800(2) of the Income Tax Regulations, it has the choice or may be recognized as a non-publicly traded company.
Control by a Public Corporation in Canada
This corporation is a Canadian branch of the aforementioned public corporation. Nevertheless, while submitting the T2 Corporation Income Tax Return, it fails to meet the criteria for being classified as a public corporation.
Any corporation that does not fall under the aforementioned categories is categorized as an “alternative corporation.”
Choosing Your Corporation Type in Canada
Although setting up sole proprietorships and partnerships may be simpler and cheaper, opting for a corporation provides enhanced safeguards against liability and enhances credibility. Additionally, if you decide to establish your small business as a corporation in Canada, it is advisable to explore the benefits of a Canadian-controlled private corporation due to the tax advantages it offers. Nonetheless, the associated expenses and administrative tasks often prompt businesses to delay incorporating until their annual revenues exceed $50,000.
CBES is here to assist you; feel free to contact us for expert guidance.
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