Alan just immigrated to Canada and owns STARS ltd (US company). Alan owned 100% of shares to STARS ltd. STARS ltd. was incorporated in the US in 2004. Alan wanted to know if he should use STARS ltd or a new company to carry on his business in Canada?
He's also not sure whether this US company would be a Canadian controlled private corporation?
In addition to that, what are some tax advantages of being CCPC other than the $750k tax free gain?
To determine whether Alan should use STARS Ltd or a new company to carry on his business in Canada, he should consider several factors, including legal, tax, and strategic implications.
1. Legal Considerations:
Alan should consult with a legal professional to understand the legal requirements and procedures for incorporating a foreign-owned company in Canada. Some important considerations include compliance with Canadian laws, jurisdictional differences, and potential liabilities associated with continuing business operations as STARS Ltd in Canada.
2. Tax Considerations:
Canadian tax laws have specific rules for determining whether a foreign-owned company, like STARS Ltd, would be considered a Canadian controlled private corporation (CCPC). The CCPC status can have significant tax advantages, including reduced tax rates and access to certain tax incentives. To determine if STARS Ltd would qualify as a CCPC, Alan should analyze the following conditions:
a. Ownership: As the sole owner of STARS Ltd, Alan must consider his residency status, as well as the residency status of other shareholders. Generally, CCPC status requires that more than 50% of the shares be owned by Canadian residents.
b. Active Business Income: The company's primary source of income should be active business income, rather than passive income like investment or rental income.
c. Limitation on Capital and Real Property: CCPCs have certain limitations on passive investment income, real property, and capital used in active business operations. Alan should evaluate whether the current structure of STARS Ltd meets these requirements.
d. Associated Corporations: If STARS Ltd is associated with other corporations, Alan should consider the aggregate effect on meeting the CCPC criteria.
It is strongly recommended that Alan consult with a tax professional who is knowledgeable about both US and Canadian tax laws to accurately assess the CCPC status of STARS Ltd.
3. Additional Tax Advantages of CCPC Status:
Besides the $750,000 lifetime capital gains exemption, CCPCs enjoy several other tax advantages, which may differ based on the province or territory where the company operates. Some common benefits include:
a. Lower Tax Rates: CCPCs often benefit from lower income tax rates than non-CCPCs on active business income.
b. Scientific Research and Experimental Development (SR&ED) Tax Incentives: CCPCs may be eligible for significant tax credits and deductions for qualifying research and development activities.
c. Small Business Deduction: CCPCs can claim a small business deduction, which reduces the tax rate on the first $500,000 of active business income.
d. Access to Tax Incentive Programs: CCPCs may gain access to specific tax incentive programs at the federal and provincial levels, promoting technology development, job creation, and regional economic growth.
Again, consulting with a tax professional will provide Alan with detailed and specific information about the tax advantages that apply to his particular situation, business activities, and location in Canada.