Take Advantage of These Tips to Save You Big Dough

By Marc Henein
Legally, a corporation has a separate identity from the owners (shareholders) and as such it is taxed separately as well. This has implications, many favourable, for the owners. As a separate entity, the corporation is required to file its own tax return and is required to pay tax on income earned. For the owners of private corporations there are two main advantages:

  • The Small Business Deduction (SMABUD)

Ordinarily, corporate income is taxed federally at 38%. This will be reduced by 10% to reflect the tax applied by the provinces and territories. However, companies that qualify as Canadian Controlled Private Corporations (CCPCs) are allowed a further 17% tax reduction on ‘Active Business Income’ of up to $500,000 per year. This reduces the federal tax rate to 11%. Once the provincial/territorial taxes have been included, the corporate tax rate for CCPCs is in the 20% range. This is one of the most attractive tax features of owning and managing a private Corporation. As noted, this tax break applies strictly to the ‘Active Business Income’ of a CCPC. The definitions of these terms are quite specific, but, in general, they can be defined as follows:

  • Canadian Controlled Private Corporation (CCPC)
    • A CCPC is a Corporation that is not controlled, directly or non-directly, by a non-resident or a public Corporation or any combination of the two. As well, no class of shares of the Corporation can be listed on a stock exchange.
  • Active Business Income
    • Generally, Active Business Income is the income earned from the regular activities of a company and does not include investment income, income from a holding company or income from a Specified Investment Business (one that derives its income from property – interest, dividends, rents and royalties).
    • A qualified tax Advisor should be consulted to ensure that your Corporation is eligible for the SMABUD.
  • Capital Gains Exemption (CGE)

This is the other attractive tax advantage that can be derived from owning/managing a private Corporation. Upon the disposition (sale) of shares of Qualified Small Business Corporations, the tax on up to $750,000 of capital gains can be offset or eliminated. For example: Jane is the 100% shareholder of Jane Inc., a Corporation she started in 1988. In 2010, she decided to retire and sell her company shares for $1,500,000. The Adjusted Cost Base (ACB) of her shares was $500,000 at the time of sale. She will incur a capital gain of $1,000,000 ($1,500,000 – $1,000,000) or a taxable capital gain of $500,000 ($1,000,000 X 50%). Assuming she has never used her capital gain deduction before, she can offset $750,000 of the capital gain, leaving her with a capital gain of $250,000 or a taxable capital gain of $125,000 ($250,000 X 50%). The CGE is clearly an excellent tax break and one that attracts many people to the corporate structure, and the CGE can play a significant role in retirement and estate planning.

Marc Henein is a Senior Wealth Advisor for Scotia Wealth Management. Marc Henein joined ScotiaMcLeod in 2004. Working in partnership with the client’s tax and legal professionals, Marc manages portfolios focused on capital preservation and tax efficient income generation. In some of Marc’s spare time he writes Investment and Financial Planning related articles for the Globe & Mail to share some of his knowledge which has helped many Canadians with their Wealth Management. Marc graduated from Wilfrid Laurier University and has stayed involved as President of the Wilfrid Laurier University’s Alumni Association. He has achieved some of the highest designations within the Investment and Financial Planning Industry. He has obtained Chartered Financial Planner (CFP) designation, is a Fellow of the Canadian Securities Institute (FCSI) and the Chartered Professional (Ch.P.) Strategic Wealth designation. Marc can be reached at 905.896.6452 or marc.henein@scotiawealth.com or www.marchenein.ca.

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