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Chapter 13 - Chapter Thirteen 1CHAPTER 13 THE...

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Chapter Thirteen 1CHAPTER 13 THE CANADIAN-CONTROLLED PRIVATE CORPORATION SOLUTIONS TO REVIEW QUESTIONS 1. A Canadian-controlled private corporation is defined as a Canadian private corporation that is not controlled directly or indirectly, in any manner whatever, by one or more non-residents or by one or more public corporations. In this particular case, even though the corporation is not actually controlled by Canadians (50%) it is also not controlled by non-residents (50%). Therefore, by definition, the corporation is a Canadian-controlled private corporation [S.125(7)]. 2. Basic differences between public corporations and Canadian - controlled private corporations: Rates of Tax - The rates of tax applicable to a public corporation and a CCPC differ in several ways. In a CCPC the first $400,000 of annual active business income is eligible for the small business deduction [S.125(1)] of 16% reducing federal taxes (after the 10% abatement) to 12%. In most provinces, the provincial rate is also reduced for this income. Also, the CCPC is only eligible for the federal 7% manufacturing and processing deduction on M & P profits that are not subject to the small business deduction [S.125.1(1)]. In a CCPC, investment income is subject to a 6 2/3% refundable tax [S.123.3] and dividends from non-connected corporations are subject to a 33 1/3% Part IV tax [S.186(1)] which is not the case for public corporations. Double Taxation - Because all income of a public corporation is taxed at the high rates, some double taxation occurs when that income is distributed to shareholders. In a CCPC, only active business income that is not subject to the small business deduction is subject to double taxation. All other income of a CCPC results in combined corporate tax and shareholder tax that approximates the individual shareholders' personal rate of tax. This is achieved from the small business deduction on active business income, the refund mechanism on property income and taxable capital gains [S.129(1)], and the special tax-free dividend distribution on certain non-taxable income such as one-half of capital gains [S.83(2)]. Secondary Relationship - A secondary relationship exists when a shareholder also acts in another capacity with the corporation such as a creditor lending funds to the corporation, a lessor leasing property to the corporation, or as an employee of the corporation. Such relationships are common in a CCPC because the number of shareholders is usually small and the affairs of the corporation and the shareholders are closely associated. In a public corporation, there are a large number of shareholders who do not participate in the management of the corporation, and therefore secondary relationships are rare. 242
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Chapter Thirteen 3. The statement is not true. Active business income is defined as any business carried on by the corporation other than a specified investment business or a personal service business. While the definition excludes a personal service business it does not mean income from selling services is excluded. The term
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