Correcting an imbalance in Canada’s tax system
Here’s a fact for you: Every public and foreign-controlled Canadian corporation pays tax at 26.5 per cent on all income, including investment income, and just 13.25 per cent on realized capital gains.
In recent years, some owner-managers have implemented perfectly legal tax planning to take advantage of the same rates available to PAFs. This is done by converting a CCPC to a different type of private corporation – called a non-CCPC. But now, the CRA has embarked on an audit project to shut down this planning and deny Canadian owners access to the rates available to PAFs.
There are some good reasons why owners may want their corporations to have CCPC status. CCPCs can, for example, access low tax rates on the first $500,000 of active business income and some advantageous tax credits. Also, shareholders of CCPCs may be able to enjoy other tax benefits, including the ability to shelter $913,630 in capital gains on their private-company shares using the lifetime capital-gains exemption.
Nevertheless, the CRA – which has been aware of non-CCPC planning for more than a decade – has recently decided that the planning is abusive. So, at significant cost to the federal government and taxpayers, the CRA has begun an audit project and is reassessing non-CCPCs using the General Anti-Avoidance Rule – a provision in our tax law that can deny tax-planning benefits if the planning violates the spirit of the law, even if it’s within the wording of the law.
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