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Our clients are often concerned about maintaining or obtaining the CCPC status. What does it mean to be a Canadian-controlled private corporation? How to obtain this title and what are the consequences?
A Canadian-Controlled Private Corporation (“CCPC”) is a notion defined by section 125 (7) of the Income Tax Act (“I.T.A.”). Corporations are often interested in acquiring such a status for the following reasons:
- The CCPC is subject to a lower tax rate for the first $ 500,000 of taxable income;
- The CCPC benefits from an enhanced and refundable, partially or entirely, tax credit for its scientific research and experimental development expenditures;
- The CCPC is subject to favorable treatment with respect to stock options issued to its employees and capital gains exemptions
Obtaining this status depends on specific criteria to which any corporation wishing to qualify as such must comply with. The corporation must demonstrate that it is not controlled by a person who is not a Canadian resident, within the meaning of I.T.A. or a public corporation, and has at least one class of its capital stock that is not listed on a stock exchange.
Canadian-controlled private corporation status is inherently linked to the control exercised over the corporation. It is essential to determine whether or not the corporation is controlled by non-residents, public corporations or a combination of both.
To this end, jurisprudence has defined the notion of control as the power to appoint a majority of the members of the board of directors of a corporation. A majority shareholder, to the extent that such shareholder holds a number of shares conferring a majority of the votes for the election of the board of directors, may be considered to have effective control.
The courts have established a list of the most relevant elements to consider in order to ascertain who has effective control of the corporation, for example, the articles of incorporation, the register of shareholders of the corporation; any restriction that arises from the governing documents of the corporation, a unanimous shareholder agreement or both.
Direct or indirect control as stated in article 125 (7) (a) I.T.A. refers to both de jure and de facto control. In other words, even if a shareholder agreement states that the shareholders have the power to elect the board of directors, if in fact those shareholders are non-residents, the corporation will not be considered as a CCPC.
The drafting of corporate documents can be all the more complex since many provisions may implicitly lead to the control of the corporation by non-residents, such as provisions relating to the transfer of shares or purchase of shares by third parties, which shall modify the shareholding.
As you may have understood, the CCPC’s status can be easily compromised. Seeking legal advice to prevent the loss of your CCPC status or to make the necessary arrangements to obtain such status is highly recommended. For more information on this matter, do not hesitate to contact one of our experts in business law.