Jan 2016
CCPC Tax Planning
For many Canadians, a new year evokes fond memories of lower personal tax rates and less onerous corporate investment and Canadian-controlled private corporation (CCPC) tax rates in the past.
In this article, we’ll take a closer look at CCPC tax planning considerations, including current rates and approaches you can take to minimize your liability.
CCPC tax rate as of 2021
Per the Government of Canada’s website, the federal CCPC tax rate for companies claiming the small business deduction is 9 per cent. This rate was introduced on January 1, 2019, and continues to apply as of the 2021 tax year.
Provincial CCPC tax rates
Provinces and territories set their own CCPC tax rates, which are as follows according to the Government of Canada’s website.
| Province or territory | Low rate | High rate |
|---|---|---|
| Newfoundland and Labrador | 3 per cent | 15 per cent |
| Nova Scotia | 3 per cent | 16 per cent |
| New Brunswick | 2.5 per cent | 14 per cent |
| Prince Edward Island | 3 per cent | 16 per cent |
| Ontario | 3.2 per cent | 11.5 per cent |
| Manitoba | None | 12 per cent |
| Saskatchewan | 2 per cent | 12 per cent |
| British Columbia | 2 per cent | 12 per cent |
| Nunavut | 3 per cent | 12 per cent |
| Northwest Territories | 4 per cent | 11.5 per cent |
| Yukon | 2 per cent | 12 per cent |
Each province’s low rate applies to income eligible for the federal small business deduction. Everything else is taxed at the higher rate.
Key CCPC Tax Planning Considerations
Next, let’s take a look at a few key CCPC tax planning considerations that can help you minimize your liability.
Exempt vs. Non-Exempt Life Insurance Policies
But there is a way to mitigate these tax changes—through the cash value found in an exempt life insurance policy. Non-exempt life insurance policies are subject to annual accrual taxation on investment earnings; e.g., the growth or increase in the cash value. But the growth of the cash value in an exempt life insurance policy is, literally, exempt from that accrual taxation—and at death, is paid tax-free, as part of the insurance policy’s death benefit, to the corporation.
Not only is there no tax deferral with a non-exempt policy, but there is also now a greater tax cost and prepayment of tax to the federal government from earning investment income in a CCPC. The corporate investment income tax rates that have increased as a result of the increase in personal tax rates include refundable tax rates.
Refundable Tax on CCPC Investment Income (dividends)
The corporate investment income tax rates (and the various components) are part of the refundable tax mechanism that operates through the “refundable dividend tax on hand,” or RDTOH accounts for short. The RDTOH account ensures that the overall tax payable on investment income is basically the same whether it is first earned in your corporation and then paid to shareholders as a dividend or if you earn it personally in the first place. The high corporate investment income tax rates (and the RDTOH) also ensure there is no deferral of tax on investment income by having it first earned in a corporation before being distributed to shareholders as a dividend.
Refunds always sound good, but when it comes to taxes and refunds, “refunds” is a deceiving term. You shouldn’t think of tax refunds as a windfall. It’s true you will get more refundable tax back when you finally pay dividends to individual shareholders. But in the meantime, you are paying higher rates of tax to Ottawa and getting no return or interest on the money your company had prepaid in taxes. Instead of allowing the government to have use of that money, you could be putting it to work for your own purposes in your business.
Minimize Corporate Investment Income Tax Rates
To minimize the higher corporate investment income tax rates, consider taking advantage of the tax deferral opportunity available from the cash value growth inside an exempt permanent life insurance policy.
There is another time-sensitive point to keep in mind. The exempt status testing of permanent life insurance policies is about to change on January 1, 2017. Current policies, issued before 2017, are to be grandfathered so the benefits, generally speaking, will remain as they are.
The Rules Changed in 2017
In 2017, new federal legislation came into effect that changed the “exempt test” of life insurance policies to reflect the fact that people are now living longer (i.e. mortality experience is improving) and so their insurance policies will pay out later in life. One of the major differences in the new policies will allow for more tax sheltering in the first eight years of a new policy, but less over the long term. There are additional consequences to corporate-owned insurance as a result of the exempt test changes. For example, life insurance policies issued after 2016 will likely have a larger adjusted cost basis for a longer period of time meaning a smaller credit to the capital dividend account of private companies and therefore a smaller amount of tax-free capital dividends to shareholders.
Few Safe Havens Left
There aren’t many places to safely preserve and grow your money on a tax-exempt basis. The shrinking list includes your principal residence, your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF)—but only until you take the money out of these—and your Tax-Free Savings Account (TFSA). One of the last remaining safe havens is the exempt life insurance policy.
Choose Your Beneficiaries
You have three possible beneficiaries of your final estate: the government, loved ones, and favourite charities. Given the opportunity to pick only two of the three as beneficiaries, most individuals inevitably and understandably choose family and charity, leaving nothing for the tax department.
If your wealth is not properly directed, the federal government will automatically collect a tidy sum from your estate upon the death of the second spouse.
The New Top Tax Bracket and the Ripple Effect
For individuals in the new (as of 2017) top tax bracket it is also possible that a tax rate of more than 50 per cent will apply to your hard-earned RRSP and RRIF savings, a 32 per cent tax rate will apply to dividends (e.g., on the value of assets in your holding/operating company when distributed as a dividend) and a tax rate of at least 25 per cent will apply to accrued capital gains on investments, real estate, and business equity. Most people are unaware of the potential exposure to these significant tax liabilities.
Tax rules will inevitably continue to grow more complicated, and we know from experience that when rules change it’s rarely for the benefit of the taxpayer. This is the time to take advantage of the current tax deferral opportunities to grow cash value inside an exempt permanent life insurance policy. I know that you, like most readers, will easily identify much better and smarter ways to use your money than giving it to the government in the form of higher taxes.
Seek Professional Advice
It makes sense to invest 60 minutes of your time with a professional planner to keep your money in the family. Contact us to determine how this strategy can help you, or to get a second opinion on your current planning.
Don’t do it yourself. Seek professional help. The best way to get financial peace of mind is by getting advice from an impartial and experienced team that includes your accountant, lawyer, and a Certified Financial Planner or Trust & Estate Practitioner.