Budget 2022: New anti-deferral measures for investment income – Presentation of the “fund CCPC”
Canadian federal income tax rules generally seek to achieve “neutrality” between “investment income” (including interest, rent, royalties, capital gains and “foreign income accrued on property” or “FAPI”) earned directly by Canadian resident individuals from private income. companies they control. This objective is primarily achieved by imposing additional refundable taxes on certain private corporations in the year the investment income is earned. In the absence of the refundable tax regime, investment income earned by a private corporation would be subject to a tax rate (generally 23% to 31%) significantly lower than the top marginal tax rate applicable to individuals (generally 44.5% to 54%) .
Historically, refundable tax provisions only applied to “Canadian-controlled private corporations” or “SPCCas defined in the income tax law (Canada) (the “ITA”). CCPCs are defined very broadly as generally encompassing private corporations that have been incorporated under Canadian federal or provincial laws and are not controlled in fact by non-residents or public corporations.
In recent years, the government has come to believe that the aforementioned principle of neutrality is being circumvented (resulting in perceived inappropriate tax deferrals) through arrangements designed to cause a corporation to lose its status. of CCPC, the corporation subsequently earning investment income while continuing to (a) qualify as a Canadian resident, and (b) remain under the control (whether directly or indirectly, and whether at law or in fact) Canadian residents. Budget 2022 suggests that such arrangements include those that result in a change in a corporation’s status in anticipation of capital gains from an asset sale transaction (through, for example, the signing of a purchase agreement with a non-resident buyer, or suing the company in a jurisdiction outside of Canada).
To limit the perceived deferral benefit arising from such arrangements, Budget 2022 introduces a concept of a “substantive CCPC”, which, as its name suggests, is designed to apply the refundable tax regime to investment income. earned by any business that does not fall under the technical definition of a CCPC but is “in substance” a CPCC. The measures announced attempt to align the taxation of investment income earned and distributed by “significant CCPCs” with the rules that currently apply to CCPCs.
Under the Budget Proposals, “real CCPCs” are defined as Canadian-resident private corporations (other than CCPCs) that are ultimately controlled (in law or in fact) by Canadian-resident individuals. Similar to the CCPC definition, the test for determining “substantive CCPC” status will contain an expanded definition of control encompassing shares held, directly or indirectly, by Canadian resident individuals (so that a corporation would be deemed to be controlled by an individual resident Canadian where individual Canadians hold, in the aggregate, sufficient shares to control the corporation). In addition, investment income earned by large CCPCs would be added to the corporation’s “low-rate income pool”, so that subsequent distributions of corporate income would not entitle shareholders to claim the tax credit. enhanced dividend tax.
Although Budget 2022 indicates that substantive CCPC measures are not intended to affect “genuine non-CCPCs” (which Budget 2022 indicates, by way of example, includes “private corporations that are ultimately controlled by non-residents and subsidiaries of public corporations”), it nevertheless confirms that substantial CCPCs will include corporations which “would have been CCPCs but for the fact that a non-resident or public corporation has the right to acquire his actions”. In addition, Budget 2022 proposes the introduction of an anti-avoidance rule that will provide that non-CCPCs who do not fall within the substantive definition of a CCPC will nonetheless be granted CCPC substantive status when reasonable to consider that one of the purposes of a transaction or series of transactions was to avoid such a status.
It should be noted that the substantive rules for CCPCs, as proposed, would only apply to the integration of the taxation of investment income described above, which means that a CCPC of fund would not be entitled to other benefits under the CCPC ITA, including access to the lower rate of tax available through the “small business deduction” and rights under the refundable investment tax credit rules for research and development contained in section 127.1 of the ITA.
If enacted, the substantive CCPC measures in Budget 2022 would apply to corporate taxation years ending on or after Budget Day (April 7, 2022), subject to an exception for this what the government calls “genuine business transactions” entered into before Budget Day, where the subject corporation’s taxation year ends due to an “acquisition of control” caused by the sale of all or substantially all of the shares of a company to an arm’s length purchaser that is “concluded” before the Budget Date and completed before the end of 2022. types of arrangements that would constitute a qualifying “contract of purchase and sale” for this purpose, including an agreement referred to as a “letter of agreement”. intention”.
Finally, it should be noted that, to facilitate the administration of the substantive measures proposed for CCPCs, including the earning and distribution of income by these entities, Budget 2022 provides for a one-year extension of the “period normal reassessment” in certain circumstances.
In summary, the proposed substantive rules for CCPCs could, if adopted, have an impact on a number of planning techniques traditionally employed by Canadian-owned groups, including, importantly, in the context of mergers and acquisitions. .