TaxMatters@EY – April 2025

Caitlin Morin and Janna Krieger, Toronto

Canadian-controlled private corporations (CCPCs) benefit from unique tax advantages not available to other businesses. These benefits are designed to support small businesses and foster economic growth in Canada. In general terms, a CCPC is a private corporation resident in Canada that is not controlled by nonresidents or public corporations.

In this article, we provide a high-level overview of various tax incentives and special administrative rules available to CCPCs.

Small business deduction

One of the most significant tax benefits of CCPC status is that CCPCs earning active business income can benefit from the small business deduction (SBD). The federal SBD has been the primary tax incentive in the Canadian tax system for small businesses since 1972.

The SBD reduces the federal income tax rate on income from an active business carried on in Canada to 9%.¹ The SBD is calculated as a percentage, currently 19%, of the least of several amounts, including a CCPC’s active business income earned in Canada and its business limit for the year.

For 2009 and later taxation years, the federal small business limit is $500,000. If the CCPC is part of an associated group, the small business limit must generally be shared. The provinces and territories provide a similar tax deduction based on the federal SBD.²

By contrast, the general corporate income tax rate applicable to active business income is currently 15%.³ Unincorporated business owners who are in the highest tax bracket are subject to a federal marginal tax rate of 33%.

The federal SBD is reduced if an associated group’s taxable capital employed in Canada exceeds $10 million in the preceding taxation year, and is eliminated when it exceeds $50 million.

The federal SBD is also reduced if a CCPC group earns passive investment income exceeding $50,000 in the preceding taxation year, and is eliminated when this type of income exceeds $150,000.

The applicable federal SBD reduction is equal to the greater of the taxable capital and passive investment income reductions.

An SBD reduction for large CCPCs also applies in all provinces and territories.

Enhanced and refundable investment tax credits

CCPCs have access to enhanced refundable investment tax credits for certain expenditures. For example, CCPCs are eligible for an enhanced investment tax credit rate of 35% on qualified expenditures for scientific research and experimental development (SR&ED), up to a limit of $3 million annually.⁴ This enhanced tax credit is subject to certain limitations in respect of taxable capital employed in Canada.

In comparison, non-CCPCs are eligible for the less advantageous basic SR&ED investment tax credit rate of 15%. CCPCs are therefore eligible for an additional 20% credit on expenditures incurred in a taxation year, up to the expenditure limit.

The SR&ED investment tax credit is nonrefundable for corporations that are not CCPCs, and can therefore only be used to offset federal income tax otherwise payable.⁵ However, CCPCs may receive all or part of their current-year earned investment tax credit as a cash refund in taxation years when no federal tax is otherwise payable under Part I of the Income Tax Act; that is, the enhanced tax credit is refundable. Due to these differences, the current SR&ED program is particularly advantageous to CCPCs.

Notably, in its 2024 fall economic statement, the federal government proposed certain enhancements to the SR&ED program, including to increase, from $3 million to $4.5 million, the annual expenditure limit on which CCPCs are entitled to earn a 35% SR&ED investment tax credit. Additional proposals include an extension of the 35% refundable SR&ED investment tax credit to eligible Canadian public corporations, up to the increased annual expenditure limit. For more information, see EY Tax Alert 2024 Issue No. 64, “Federal government announces enhancements to the SR&ED program.”

CCPCs that meet certain conditions are also eligible for regional tax incentives, such as Ontario’s 10% refundable regional opportunities investment tax credit and the Ontario-made manufacturing investment tax credit.

Lifetime capital gains exemption

Another significant tax benefit of CCPC status is that shareholders of certain CCPCs may be eligible for the lifetime capital gains exemption (LCGE) on the sale of their shares, making certain proceeds tax exempt.

The LCGE is available only on the sale of qualified small business corporation (QSBC) shares or qualified farm or fishing property. In general, a share is a QSBC share for the purposes of the LCGE if it is a share of a small business corporation — generally, a CCPC whose assets are used principally in an active business carried on primarily in Canada — and satisfies both a 24-month holding-period test and a 24-month active business asset test.

The LCGE in 2024 was $1,016,836 per person if the QSBC’s shares were sold before June 25, 2024. The 2024 federal budget and corresponding draft legislation introduced an increase in the LCGE limit to $1,250,000 for dispositions occurring after June 24, 2024. The LCGE limit will resume being indexed to inflation starting in 2026.

On January 31, 2025, the federal government announced that the 2024 budget proposal to increase the capital gains inclusion rate from one-half to two-thirds for capital gains exceeding $250,000 annually for individuals, and for all capital gains realized by corporations and most types of trusts, would be deferred from June 25, 2024 to January 1, 2026.⁶

The government also announced that this deferral would not apply to the proposed increase in the LCGE, or to the proposed introduction of the new Canadian entrepreneurs’ incentive, discussed below, effective beginning in 2025.

Subsequently, on March 21, 2025, new Prime Minister Mark Carney announced that the proposed increase in the capital gains inclusion rate — and consequential changes — was cancelled.⁷ The Prime Minister also confirmed that the government will maintain the increase in the LCGE to $1,250,000, effective June 25, 2024.⁸

If capital gains are realized on a sale of assets, or if the LCGE is not available for capital gains realized on the sale of shares — for example, because the shares are not QSBC shares or the LCGE was already used — those gains are subject to income tax.

Unincorporated business owners who are planning a future sale of their business should consider incorporating beforehand, and ensuring the shares are QSBC shares, to benefit from the LCGE.

Proposed Canadian entrepreneurs’ incentive

The proposed Canadian entrepreneurs’ incentive will provide special treatment for shareholders selling shares of CCPCs, where certain conditions are met.

Introduced in the 2024 federal budget, this new incentive will reduce the tax rate on capital gains from the disposition of qualifying property by eligible individuals, starting in the 2025 taxation year. If enacted, the incentive will provide an eligible Canadian-resident individual, other than a trust, with a taxable income deduction that will effectively reduce the capital gains inclusion rate to one-third on up to $2 million in eligible capital gains over an individual’s lifetime.

The lifetime limit will be phased in by increments of $400,000 per year beginning in 2025, until it ultimately reaches $2 million by 2029.

Given the recent announcement on March 21, 2025 that the federal government will cancel the proposed capital gains inclusion rate change, it remains to be seen whether the new government will cancel or announce modifications to this new incentive.

Qualifying Canadian entrepreneur incentive property includes QSBC shares, as well as qualified farm or fishing property, provided certain conditions are met. The incentive will not apply to shares that represent a direct or indirect interest in certain excluded businesses, such as a professional corporation, a business the principal asset of which is the reputation or skill of one or more employees, or a corporation that carries on a consulting or financial services business.

Eligible individuals will be able to claim the Canadian entrepreneurs’ incentive in addition to any available LCGE. Therefore, if a qualifying Canadian entrepreneur incentive property is also eligible for the LCGE, the incentive may be claimed against any taxable capital gain remaining after the LCGE has been claimed to maximize the amount of capital gains that may be sheltered from tax on the sale of a business.

For more information on the Canadian entrepreneurs’ incentive, or to learn about the temporary exemption from taxation for certain capital gains realized on the sale of a business to an employee ownership trust,⁹ see the Feature chapter, “Recent changes to the taxation of capital gains and employee stock options,” in the latest edition of Managing Your Personal Taxes: a Canadian Perspective.

Employee stock option benefits

CCPCs can grant stock options to their arm’s-length employees with certain benefits not available to non-CCPC stock options. The preferential tax treatment available for CCPC stock options can make them a valuable employee attraction and retention tool.

By way of background, when an employee acquires shares under an employee stock option plan, the excess of the value of the shares on the date the employee acquired them over the price paid for them is included in the employee’s income from employment as a stock option benefit. When the corporation is not a CCPC, the benefit is generally included in the employee’s income in the year they exercise the option and acquire the shares. When the corporation is a CCPC, the stock option benefit is taxed in the year the employee disposes of the acquired shares, rather than in the year the shares are acquired.

One-half of the stock option benefit included in income generally qualifies as a deduction, provided certain conditions are met.

As initially announced in the 2024 federal budget, the government proposed to reduce the employee stock option deduction from one-half to one-third of the stock option benefit for stock options exercised after June 24, 2024 to reflect the proposed increase in the capital gains inclusion rate from one-half to two-thirds.

In the case of CCPC stock options, the proposed amendments would have reduced the stock option deduction to one-third where the acquired share was disposed of or exchanged after June 24, 2024. The proposed amendments allowed eligible individuals to claim a deduction of one-half of the stock option benefit up to a combined annual limit of $250,000 for both employee stock options and capital gains.

Following the federal government’s announcement that the proposed increase in the capital gains inclusion rate would be deferred, the Department of Finance had confirmed that the proposed reduction to the employee stock option deduction would also be deferred until January 1, 2026.¹⁰

As noted above, the Prime Minister has announced that the government will cancel the proposed increase in the capital gains inclusion rate and consequential changes. It is therefore anticipated that the proposed reduction to the employee stock option deduction will also be cancelled, and that eligible individuals will continue to be able to claim the one-half deduction for employee stock options.

For certain options granted on or after July 1, 2021, the availability of the stock option deduction is limited to an annual maximum of $200,000 of stock option grants that vest — that is, become exercisable — in a calendar year, based on the fair market value of the underlying shares on the date of grant. These amendments are intended to restrict the preferential tax treatment of stock options for employees of large, mature companies. As such, the limitations do not apply to stock options on CCPC shares, or those granted to employees of startup, emerging or scale-up companies.

The tax benefits of employee stock options granted by a CCPC compared to a non-CCPC are summarized as follows:

• The stock option benefit is taxed in the year the employee disposes of the shares, rather than in the year they were acquired. This tax deferral acknowledges the lack of liquidity of private company shares and is available even if the corporation is no longer a CCPC when the employee exercises the stock option. Accordingly, granting stock options as a CCPC can serve as a valuable incentive to retain and reward key employees before going public.
  
  
• If the employee held the CCPC shares for at least two years, the stock option deduction may be available even if the price the employee paid for the shares was less than their value at the date the stock option was granted. For non-CCPC stock options, the deduction is not available if the exercise price was less than the value of the shares at the date of grant.
  
  
• The $200,000 annual vesting limit does not apply to stock options granted by CCPCs, or to non-CCPCs with annual gross revenue of $500 million or less.
  
  
• The employer is relieved of the obligation to withhold and remit income tax when a taxable benefit is received by an arm’s-length employee on the disposition of CCPC shares.

Additional special rules for CCPCs

In addition to the tax benefits described above, CCPCs enjoy special rules that offer greater financial flexibility and reduced administrative burdens.

For example, CCPCs benefit from a shorter period during which the CRA may issue a reassessment. The normal reassessment period for a CCPC or an individual is three years from the earlier of the day the original notice of assessment is sent and the day the original notification that no tax is payable is sent.¹¹ For a corporation that is not a CCPC, the normal reassessment period is four years from the earlier of those two days.

In addition, special rules allow eligible CCPCs to pay corporate income tax instalments quarterly rather than monthly.¹² Finally, eligible CCPCs generally have an additional month to pay the balance of tax payable at the end of a taxation year. The balance of tax is generally due three months after the end of the taxation year, instead of the usual two months for a corporation, if the corporation meets certain conditions.¹³

Conclusion

The Canadian tax system offers significant tax incentives for small businesses. From the SBD to enhanced and refundable investment tax credits, these incentives help CCPCs increase their after-tax income for reinvestment in their business. The preferential tax treatment available to shareholders on the sale of QSBC shares, and the special tax benefits of employee stock options granted by a CCPC, further enhance the advantages of CCPC status.

If you would like to understand the implications of CCPC status in greater detail, or for more information about any of the tax incentives discussed in this article, please reach out to your EY or EY Law advisor.

Krista Fox, Toronto, Jeanne Posey and Gael Melville, Vancouver

In this recent case, the Federal Court of Appeal (FCA) overturned the lower court’s decision and found that the surviving partner of a deceased tax debtor is not considered a spouse for the purposes of subsection 160(1) of the Income Tax Act (the Act), which deals with tax liabilities when property has been transferred to a non-arm’s-length party. As a result, the CRA could not claim the proceeds of the deceased’s RRSP, which he had left to his designated beneficiary, his surviving spouse.

Facts

The taxpayer and her husband lived in Alberta. The husband was the sole annuitant of an RRSP and designated his wife as the sole beneficiary. Following the husband’s death in 2013, the RRSP’s fair market value, which amounted to almost $103,000, was paid out to his widow, who then transferred the funds into her own locked-in retirement account. Generally, RRSPs do not form part of the deceased annuitant’s estate if there is a designated beneficiary, since the RRSPs are transferred directly to them.

On April 12, 2017, when the taxpayer’s appealed assessment was raised, her husband’s estate had an unpaid income tax liability of $146,382 in relation to his 2004 through 2012 taxation years. The Minister assessed the taxpayer under subsection 160(1) of the Act for an amount equal to the RRSP’s fair market value, on the basis that she was still her husband’s spouse when he died, and therefore was liable for his outstanding tax liability.

Subsection 160(1)

Subsection 160(1) is an anti-avoidance provision that is intended to prevent a tax debtor from transferring property to a non-arm’s-length person to avoid paying taxes. If this provision applies, the tax debtor and the non-arm’s-length person are jointly and severally liable for the debtor’s taxes owed.

The FCA set out the criteria for determining whether subsection 160(1) applies in The Queen v Livingston as follows:¹

• The transferor must be liable to pay tax at the time the property is transferred.
  
• There must be a direct or indirect transfer of property, whether by means of a trust or by any other means.
• The transferred property’s fair market value must be higher than that of the consideration the transferee gives.
• The transferee must either be:
  • The transferor’s spouse or common-law partner at the time of transfer,
  • A person under 18 years of age at the time of transfer, or
  • A person with whom the transferor was not dealing at arm’s length.

The Tax Court addressed the specific issue of the meaning of spouse for purposes of subsection 160(1) of the Act in two prior decisions, Kiperchuk v The Queen² and Kuchta v The Queen³, which reached opposing conclusions.

In Kiperchuk, the Minister assessed the taxpayer under subsection 160(1) on the basis that her spouse had transferred the proceeds of his RRSP on his death in 2002 to the appellant, a designated beneficiary, for no consideration at a time when he was liable for tax for the 1994 through 2001 taxation years. The taxpayer and her husband had been separated but were not divorced when he died. In allowing the taxpayer’s appeal, the Tax Court found that the marriage ended with the husband’s death, so subsection 160(1) did not apply.

In Kuchta, the Minister assessed the taxpayer under subsection 160(1) as the sole designated beneficiary of two RRSPs her husband held at the time of his death. The taxpayer argued that her marriage had already ended by the time the RRSPs were transferred, since their relationship ceased immediately after his death, so the conditions of subsection 160(1) were not met. The Minister argued, on the other hand, that the relevant time for determining the taxpayer’s relationship to her husband was when her husband designated her as a beneficiary of the RRSPs. Alternatively, the Minister argued that the term spouse in subsection 160(1) included the spouse of a tax debtor immediately prior to death. In dismissing the appeal, the Tax Court undertook a textual, contextual and purposive analysis of the word “spouse” in subsection 160(1) and ultimately held that a spouse included a widow or widower, so subsection 160(1) did apply.

Tax Court of Canada decision

At trial, the Minister argued that the court should follow the Kuchta decision because its analysis was strong and, in contrast to Kiperchuk, it specifically addressed the meaning of the word “spouse” for purposes of subsection 160(1).

The taxpayer argued that on her husband’s death, when entitlement to the RRSP funds transferred to her, she ceased to be his spouse. Further, she asserted that Kuchta created greater uncertainty with respect to the meaning of spouse elsewhere in the Act if it required a textual, contextual and purposive analysis test for other provisions that use the word spouse. In her view, only a textual approach should have been used in deciding the issue rather than a full textual, contextual and purposive analysis approach.

In dismissing the appeal, the Tax Court relied on the reasoning in Kuchta and determined that for the purpose of subsection 160(1), a spouse includes a widow or widower.

FCA decision

The FCA undertook its own textual, contextual and purposive analysis and concluded that for the purpose of subsection 160(1) of the Act, a spouse does not include the surviving partner of a deceased tax debtor. As a result, the FCA allowed the taxpayer’s appeal.

Specifically, the FCA determined that the ordinary meaning of spouse is a person who is married to another individual and, since marriage ends on one spouse’s death, it follows that the survivor is no longer the deceased’s spouse. In contrast to Kuchta, the FCA in Enns found it was not necessary to consider a colloquial meaning of spouse for purposes of subsection 160(1).

Examining the broader context of the Act, the FCA found that the Tax Court judge in Kuchta erred in failing to consider the definition of “common law partner” in subsection 248(1) of the Act, since common law partners are treated the same way as spouses for purposes of the Act. The FCA pointed out that the opening portion of the definition refers to two individuals who are cohabiting in a conjugal relationship, and that relationship would end when one of them died.

The FCA also analyzed the intent behind a deeming rule in the definition, specifically whether Parliament intended it to apply even when one partner dies. The FCA’s contextual analysis found that a person stops being a common law partner following their partner’s death. Therefore, to ensure spouses and common law partners are treated equally under the Act, the transfer of an RRSP to the designated beneficiary who was married to the deceased immediately before death would not be a transfer to a spouse for purposes of subsection 160(1).

In its decision, the FCA also relied on a number of provisions of the Act, including subsection 146(8.91), which refers to “the spouse or common-law partner of the deceased”. The FCA took the view that this provision indicated that Parliament intended that an individual who was the spouse or common law partner of a deceased individual immediately before their death would still be treated as such following their death, noting that there was no similar language in section 160.

With respect to the purpose of subsection 160(1), the FCA effectively determined that it was not Parliament’s intention to prevent a person’s assets from being transferred to their spouse when they die. The FCA noted that if the provision did apply in such a situation, the taxpayer would be taxed twice on the RRSP she inherited. She would have to pay $103,000 to the CRA to satisfy the subsection 160(1) assessment, and withdrawing those funds from her RRSP to pay the debt would require that amount to be added to her income for tax purposes for that year, resulting in tax essentially becoming payable twice. The FCA stated that it was far from clear that Parliament intended this result.

Having concluded that a surviving partner is not a spouse for purposes of subsection 160(1), the taxpayer was also not a spouse at the time the RRSP was transferred to her and therefore she was not liable for her deceased spouse’s tax debt.

Lessons learned

This decision clarifies conflicting prior Tax Court decisions, effectively limiting the CRA’s section 160 assessment powers to situations involving property transfers between living spouses or other non-arm’s-length individuals. It also provides a timely reminder to make sure your beneficiary designations for RRSPs and other registered plans reflect your intended intentions on death and that your designations are fully up to date.