Common Mistakes People Make When Considering CCPC Corporations
A Canadian-controlled private corporation (CCPC) is a private corporation that was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year. In short, a Canadian-controlled private corporation is simply a type of private corporation controlled by residents of Canada.
A 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.
However, while you get special tax benefits such as small business deductions, and enhanced investment tax credits for expenditures, you can lose your CCPC status if control of the corporation is not with the residents of Canada. To help you avoid some basic errors that could prove costly, ACT Services has compiled a list of the most common mistakes Canadians make when it comes to CCPC corporations and tax savings
1. Paying yourself too much
Paying yourself too much defeats the benefits of a CCPC with a small business deduction in place for earning below $500,000 each year. A CCPC with a small business deduction rate is only taxed at 12.5% in Ontario. So, why pay more at the personal tax level? Incorporated individuals can opt to pay themselves a lower salary and then take the rest of their income as dividends to reduce CPP premiums.
2. Paying yourself only a salary
The significant disadvantage to paying yourself a salary from your corporation is that you will have a personal income. Salary is one hundred percent taxable (unlike dividends, which are taxed at a lower rate), so it’s possible that paying yourself a salary could increase your tax load. As for Canada Pension Plan (CPP), note that you will have to pay both portions of CPP as you will be both the employer and the employee.
3. Paying yourself solely in dividends
Dividends are taxed at a lower rate than salary, which can result in you paying less personal tax, and not having to pay into the Canada Pension Plan can save you money. However, the disadvantage is that receiving dividends can hinder other possible personal income tax deductions for you, such as child care expense deductions.
The solution to this is salary or bonus is paid out to ensure the corporation doesn’t earn over $500,000, and then dividends are paid out if more income is required.
This is because $500,000 is the Small Business Limit. Up to this amount of income, a privately controlled Canadian Corporation (CCPC) pays income tax at a much lower rate than it would on income over this amount. It should be noted that a CCPC with a small business deduction is also a tax deferral vehicle, suitable for retirement income (dividend) in later years.
To avoid these mistakes, reach out to the tax experts at ACT Services. With over twenty-five years of experience in accounting, taxation, and advisory, we believe in a personal yet professional approach and provide services to businesses, corporations, and individuals. We serve clients across Toronto, Brampton, Mississauga, Vaughan, Markham, Ottawa, Kemptville, Carleton Place, Pembroke, Petawawa, Eganville, Arnprior, Shawville, Pakenham, Mississippi Mills, Braeside, Ontario, Calgary, Bragg Creek, Chestermere, Indus, De Winton, Millarville, Priddis, Okotoks, Alberta, Chelsea, Chapeau, Mansfield-et-Pontefract, Kinburn, Québec, and the surrounding areas.
Get in touch today!
For a complete list of our services, please click here. If you have any questions about accounting, consulting, or tax planning services, we’d love to hear from you. Please contact us here.
