Taxation of a Canadian Controlled Private Corporation

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Understanding

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.


Additional Knowledge Expected of CFP Professionals
  • Identify the Canada Revenue Agency’s requirements for a corporation to qualify as a Canadian-controlled private corporation.1
  • Identify the Canada Revenue Agency’s requirements for a corporation to qualify as a private corporation.2 
  • Identify the Canada Revenue Agency’s requirements for a corporation to qualify as a public corporation.3 
  • Identify the Canada Revenue Agency’s requirements for a corporation to qualify as an other corporation.4
  • Identify methods by which a business owner may draw income or assets from a Canadian-controlled private corporation in which they are a shareholder, such as: 
    • Salary or bonus 
    • Capital Dividend Account
    • Refundable Dividend Tax on Hand Account
    • Dividends
    • Loans to shareholder
    • Repayment of shareholder loans
    • Repayment of capital  
  • Explain the theory of integration that aligns the tax liability of a business owner who receives either dividends or a salary from a Canadian-controlled private corporation in which they are a shareholder.  
  • Explain the tax treatment of a business owner drawing a salary from a Canadian-controlled private corporation in which they are a shareholder. 
    • Tax treatment to the business owner
    • Tax treatment to the corporation 
  • Explain advantages to a business owner of drawing a salary from a corporation in which they are a shareholder.  
  • Define capital dividend account. 
  • Define capital dividend.  
  • Explain the tax treatment of receiving a capital dividend from a Canadian-controlled private corporation. 
    •  For the business owner
    •  For the corporation 
  • Define a connected Canadian-controlled private corporation.  
  • Explain the purpose and application of the Small Business Deduction. 
  • Define the Small Business Limit. 
  • Identify the effect of receiving passive income on the Small Business Limit for a Canadian-controlled private corporation. 
  • Define the Refundable Dividend Tax on Hand.
    • Non-eligible RDTOH
    • Eligible RDTOH 
  • Explain the purpose of the Refundable Dividend Income Tax on Hand.  
  • Identify that Canadian-controlled private corporations are entitled to the Refundable Dividend Tax on Hand. 
  • Identify the amounts that a Canadian-controlled private corporation can post to its Refundable Dividend Tax on Hand notional account, such as:
    • An addition equal to a percentage of aggregate investment income from Canadian sources
    • An addition equal to the tax paid on dividends received from a Canadian corporation that is not connected 
    • A reduction equal to the amount paid as a dividend out of the Refundable Dividend Tax on Hand account 
  • Explain the tax treatment of receiving a dividend from a Canadian-controlled private corporation. 
    • For the business owner
    • For the corporation
    • For a non-resident shareholder 
  • Define a shareholder loan. 
  • Identify the purpose for which a shareholder loan may be used. 
  • Define paid-up capital.  
  • Identify the purpose of a business owner removing an amount up to the value of the paid-up capital from a Canadian-controlled private corporation for which they are a shareholder. 
    • For the business owner
    • For the corporation 
  • Identify benefits associated with purifying the assets of a Canadian-controlled private corporation, such as:
    • Qualification for capital gains deduction
    • Creditor protection 
  • Explain methods to purify the assets of a Canadian-controlled private corporation, such as: 
    • Paying dividends out of the company to remove passive assets from the corporation sold
    • Using passive assets to pay down debts
    • Using passive assets to purchase business assets
    • Paying salaries or bonuses to remove passive assets 
  • Define a personal service business. 
  • Identify the purposes for which a personal service business (PSB) may be used. 
  • Define a specified employee. 
  • Explain the purpose of an operating company.  
  • Explain the purpose of a holding company.  
  • Explain advantages of using a holding company, such as:
    • Creditor protection
    • Estate freeze
    • Purification
    • Income splitting
    • Protection from legal claims against operating income
    • Tax deferral opportunities 
  • Explain disadvantages of using a holding company, such as: 
    • Additional costs
    • Additional regulatory and reporting requirements
    • Double taxation may occur
    • Ineligible for capital gains exemption
    • Difficulty obtaining credit

REFERENCES

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