CRA Interpretation Bulletin IT-458R2: CCPC Definition

Interpretation Bulletin IT-458R2 (May 31, 2000) is CRA’s plain-language explanation of the “Canadian-controlled private corporation” definition, the status a claimant needs for the enhanced refundable SR&ED credit. It walks through the control tests, including indirect control through corporate chains and de facto control. CRA has since archived its interpretation bulletins, so treat this as guidance of its era rather than current policy; it is still a readable companion to the statutory definition in subsection 125(7).

Key Excerpts from the Bulletin

Summary. This bulletin explains the meaning of a Canadian-controlled private corporation (CCPC) and the requirements that must be met for a corporation to be a CCPC. The appendix to this bulletin provides examples of situations which illustrate whether corporations meet the requirements to be considered a CCPC. A CCPC is a special type of private corporation that is also a Canadian corporation. In order to qualify as a CCPC it must not be controlled, directly or indirectly in any manner whatever, by public corporations, non-residents or a combination of the two.

In many respects, it is advantageous for a corporation and its shareholders that the corporation qualify as a CCPC. Some of these advantages, which are primarily designed to assist small businesses, include:

• access to the small business deduction;
• an additional month to pay the balance of taxes payable under Parts I, I.3, VI and VI.1 for the year;
• enhanced investment tax credits, which may be fully refundable, for their qualified expenditures on scientific research and experimental development;
• shareholder entitlement to the capital gains exemption on the disposition of qualified small business corporation shares; and
• deferral of an employee’s taxable benefit arising from the exercise of stock options granted by a CCPC.

¶ 1. A CCPC is defined in subsection 125(7). Under the opening words of this definition, a corporation must be a Canadian corporation and a private corporation as those terms are defined under subsection 89(1). A corporation resident in Canada that has a class of shares listed on a prescribed stock exchange in Canada is not considered to be a private corporation and, therefore, cannot be considered to be a CCPC. In addition, under paragraph (c) of the definition of a CCPC, a corporation that has a class of shares listed on a foreign stock exchange listed in section 3201 of the Regulations, will be prevented from qualifying as a CCPC after 1995. The current version of IT-391, Status of Corporations, discusses the meaning of private and public corporations for the purposes of the Act. Paragraph (a) of the definition of a CCPC provides that the corporation must not be “controlled, directly or indirectly in any manner whatever” (see ¶ 8) by one or more non-resident persons (non-residents), one or more public corporations (other than a prescribed venture capital corporation within the meaning of section 6700 of the Regulations), or any combination of non-residents and public corporations. The control test referred to in the definition of CCPC envisages situations where over 50% of the shares of a corporation are owned by one or more non-residents or by one or more public corporations regardless of whether or not a controlling group can be identified. To that end, paragraph (b) of the definition of a CCPC clarifies that, after 1995, a corporation is prevented from being a CCPC if the corporation would, if each share of the capital stock of a corporation that is owned by a non-resident person or a public corporation (other than a prescribed venture capital corporation) were owned by a particular person, be controlled by that particular person.

¶ 2. It is not necessary that a corporation be controlled by Canadian residents, private corporations or a combination thereof, in order to qualify as a CCPC. For example, if an individual resident in Canada controls 50% of the voting rights of the shares of a Canadian corporation that is a private corporation, normally, no other person or group of persons (i.e. public corporations and/or non-residents) would control the corporation for purposes of the definition of a CCPC under subsection 125(7). However, this would not be the case if control by non-residents or public corporations exists as a result of holding a right as described in paragraph 251(5)(b) and discussed in ¶s 5 or 6, or because of the existence of de facto control by non-residents or public corporations as described in subsection 256(5.1) and discussed in ¶ 8. See Example 1.

… [paragraphs 3 to 9, the Appendix examples and the Explanation of Changes are omitted here but appear in the PDF] …

Source: Canada Revenue Agency, Interpretation Bulletin IT-458R2, Canadian-Controlled Private Corporation, May 31, 2000 (now archived by CRA). Administrative guidance only, not a substitute for the law. See also the companion page reproducing the statutory CCPC definition in subsection 125(7).