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Published: February 11, 2022

Last Updated: February 21, 2022

Most Canadian small businesses operate as CCPCs (Canadian controlled private corporations) which are entitled to many tax advantages such as a lower tax rate for active business income up to $500,000 annually. However, there has been a recent trend for wealthy Canadians to convert existing Canadian controlled private corporations to non-CCPC status in order to save tax on the investment income. This is typically taken place through continuing the CCPC into an offshore jurisdiction, typically the British Virgin Islands (BVI). The Canada Revenue Agency (CRA) is starting to challenge this type of tax arrangement under the General anti-avoidance rule (GAAR) and a small number of cases have been appealed to the Tax Court of Canada by Canadian tax litigation lawyers acting on behalf of the taxpayers. In fact, the Department of Finance’s recent proposed draft legislation regarding Income Tax Mandatory Disclosure Rules published in February 2022 specifically targeted transactions that manipulate CCPC status to avoid anti-deferral rules applicable to investment income.

Investment Income Earned by Non-CCPCs is Taxed at a Lower Tax Rate

A CCPC is defined in s.125(7) of the Income Tax Act as a private corporation that is not controlled directly or indirectly by any non-resident or public corporation, or a combination of both. Generally speaking, a CCPC has the following tax advantages:

  • It is taxed at a much lower rate (12.2% in Ontario) for the first $500,000 of its active business income as opposed to 26.5% for active business income earned by a non-CCPC;
  • It is entitled to tax credits equal to 35% of the scientific research and development expenses; and
  • A Canadian resident may utilize their lifetime capital gain exemption ($914,000 for 2022) by disposing of their qualifying CCPC shares.

However, the investment income earned by a CCPC is taxed at around 50% so there is no incentive for individuals in a higher tax bracket to earn investment income via a CCPC. This 50% includes an amount paid to a notional account called the Refundable Dividend Tax on Hand (RDTOH) which is designed to prevent corporate tax deferral. All or part of the RDTOH at the end of the tax year is refunded if a corporation pays taxable dividends to its shareholders during the tax year. On the other hand, the combined federal and provincial rate on investment income earned by a non-CCPC is subject to a general corporate tax rate of around 27% (26.5% in Ontario) which offers an opportunity to defer and save tax on investment income.

How to Use a Non-CCPC for Investment Income

A fairly recent advanced tax planning strategy for small business owners is to first carry on a business as a CCPC for the tax benefits, and then convert the CCPC into a non-CCPC right before it realizes a capital gain or other investment income so that it will be taxed at lower rate.

There are two ways to create a private corporation that is a resident in Canada but not a CCPC:

  1. Give voting control to one or more non-residents, or
  2. Continue the corporation to a foreign jurisdiction while it is still controlled by Canadians.

Regarding the 1st method, the simplest way is to issue voting shares with no equity value to a non-resident. However, this may not always be available in any given situation.

The 2nd method converts a CCPC into a non-CCPC by continuing into a foreign jurisdiction while the central mind and management of the corporation remains in Canada. Under s.250(5.1) of the Income Tax Act, a continued corporation is treated as having been incorporated in the jurisdiction into which it is continued. For example, a corporation that was originally incorporated in Canada but was subsequently continued to the BVI ceases to be treated as having been incorporated in Canada, therefore it is no longer deemed to be resident in Canada although it may remain resident by keeping its central management and control in Canada. Therefore, it no longer qualifies as a CCPC.

Potential Risks from the General Anti-Avoidance Rule (GAAR)

One of the most popular jurisdictions for continuation is the British Virgin Islands (BVI). However, it is the CRA’s view that if the sole purpose of switching a corporation to a foreign jurisdiction such as the BVI is to avoid Canadian tax, it is abusive of the Income Tax Act and GAAR should disallow the favourable tax treatment by taxing the investment income at 50% instead of 26.5%. At this moment, our Canadian tax lawyers are aware of four non-CCPC avoidance cases waiting for trial at the Tax Court of Canada with a total amount of tax at issue of about $17 million. This is presumably just a fraction of the actual number of cases utilizing the strategy that have not yet been audited by CRA.

Pro Tax tips – Consult with an Experienced Canadian Tax Lawyer for Tax Planning

The tax planning strategy to change CCPC status via either continuation of a CCPC into a foreign jurisdiction to become a non-CCPC or issuing skinny voting shares with nominal redeemable amount to non-residents have been implemented many times to help business owners save taxes on investment income. However, the Department of Finance has made it clear in its recent proposed draft legislation  regarding Income Tax Mandatory Disclosure Rules that manipulating CCPC status to take advantage of lower tax rates on investment income will be subject to their scrutiny. The publication goes even further by listing the two specific methods mentioned above as examples that will be designated by the CRA for disclosure in prescribed form and manner for the purpose of s.237.4 of the Income Tax Act. Aside from this, there is still a risk from GAAR and case law hasn’t provided enough guidance. The Supreme Court of Canada (SCC) has made it clear that tax avoidance is not tax evasion and a transaction may not be abusive to the Income Tax Act even if it is designed for a tax avoidance purpose. Therefore, it is highly recommended to consult with an experienced Canadian tax lawyer to help you evaluate the risks if you are considering saving taxes on investment income via the non-CCPC migration tax strategy.



"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."


Under s.125(7) of the Income Tax Act, a CCPC is a private corporation that is not controlled by any non-resident, any public corporation or a combination of both.

As of 2022, investment income earned by a CCPC is taxed at 50.17% in Ontario but it’s only 26.5% for a non-CCPC. By continuing a CCPC into a foreign jurisdiction, it will change a CCPC into a non-CCPC so that investment income will be taxed at a much lower rate.

GAAR is defined under s.245 of the Income Tax Act. The Supreme Court of Canada in Canada Trustco Mortgage Co. v The Queen, [2005] 5 CTC 215 (SCC) sets out a 3-step legal test:

  • Was there a tax benefit to the taxpayer?
  • Was the transaction giving rise to the tax benefit an avoidance transaction?
  • Was the avoidance transaction giving rise to the tax benefit abuse?


If the answer is yes to all three questions, then any deduction, exemption or exclusion in computing income, taxable income earned in Canada may be allowed or disallowed in whole or part.

How would the Department of Finance’s proposed Income Tax Mandatory Disclosure Rules affect the tax planning strategy to save tax on investment income by converting a CCPC into a non-CCPC?

S.237.4 of the Income Tax Act gives the CRA the authority to designate certain transactions and series of transactions as requiring disclosure by taxpayers, advisers, promoters and certain other persons, with the concurrence of the Minister of Finance. Moreover, if a transaction or a series of transactions is the same or substantially similar to a transaction, or a series of transactions designated by the CRA, such transaction or series of transactions is also required to be disclosed in prescribed form and manner to the CRA. The proposed draft legislation specifically lists transactions or series of transactions related to continuing a CCPC into a foreign jurisdiction and issuing skinny voting shares of a CCPC to non-residents as designated transactions by the CRA that require disclosure.

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