Tax services

Understanding the proposed substantive CCPC rules

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Budget 2022 introduced the concept of a substantive Canadian Controlled Private Corporation (CCPC), which targets tax planning strategies that have been implemented to defer tax on investment income by manipulating a corporation’s status. On August 9, 2022, the Department of Finance (Finance) released draft legislation to implement the substantive CCPC measures.

Current rules

Generally, a CCPC is subject to a significantly higher corporate tax rate on investment income (currently ranging from 46.67 per cent to 54.67 per cent depending on the province) than a non-CCPC (currently ranging from 23 per cent to 31 per cent). The Income Tax Act (the Act) imposes an additional tax on investment income earned by CCPCs for integration purposes. A portion of this tax, however, is refundable when the company pays a taxable dividend. Investment income generally includes net property income and net taxable capital gains, but excludes dividend income already subject to a refundable tax under Part IV of the Act.

Proposed changes

A substantive CCPC is proposed to be a non-CCPC private corporation at any time in the taxation year when it:

  • is controlled (in law or in fact) directly or indirectly, by one or more Canadian resident individuals; or
  • would be controlled by a particular individual if that individual owned all the shares owned by Canadian resident individuals (even if they're dealing at arm's length).

For example, a corporation that would otherwise be a CCPC—except for the fact that a non-resident or public corporation has the right to acquire its shares—would be considered a substantive CCPC under the proposals.

The draft legislation includes an accompanying anti-avoidance provision. This means a non-CCPC may be deemed to be a substantive CCPC where it’s reasonable to conclude that one of the purposes of a transaction or series of transactions is to avoid the substantive CCPC status. Finance provides two examples of when the anti-avoidance rule would be expected to apply (assuming the ordinary rules do not), but this list is not meant to be exhaustive:

  1. Canco is a CCPC owned by three Canadian resident individuals. Prior to realizing significant capital gains, Canco issues non-participating voting preferred shares (skinny voting shares) to the non-resident children of the individuals, causing Canco to lose its CCPC status. The Canadian shareholders claim that the skinny voting shares were issued for estate planning purposes.
  2. Canco is a CCPC owned by a limited partnership (LP) that is a Canadian partnership. The general partner of LP, GPCo, is wholly-owned by a Canadian resident individual. Prior to Canco realizing significant capital gains, this individual sells all of the shares of GPCo to a non-resident individual, resulting in GPCo losing its CCPC status.

In these examples, Finance indicates that the anti-avoidance rules would apply, as it would be reasonable to conclude that one purpose of the transaction was to avoid the substantive CCPC status to receive a more favourable tax result on the capital gains (unless there are clear facts indicating otherwise).

If a corporation is a substantive CCPC, it would be subject to the same refundable tax regime on its investment income as a CCPC. Technical amendments to the capital dividend account and general rate income pool are also proposed to align the treatment of a substantive CCPC and CCPC for integration purposes. Substantive CCPCs, however, would be treated as non-CCPCs for all other purposes under the Act and therefore would not be eligible for the small business deduction, the enhanced credit for Scientific Research and Experimental Development (SR&ED) or other tax benefits available to CCPCs. In addition, to facilitate administration of the proposals, there would be a one-year extension of the normal reassessment period in certain circumstances.

Effective date

The proposed substantive CCPC rules would apply to taxation years ending on or after April 7, 2022. Certain commercial transactions entered into before April 7, 2022, may be exempt.

Proposed FAPI rule changes for CCPCs and substantive CCPCs

Budget 2022 also proposes changes to tighten the Foreign Accrual Property Income (FAPI) rules and if enacted, would impact both CCPCs and substantive CCPCs. The FAPI rules are complex and are intended to prevent taxpayers from deferring tax on investment income earned through a controlled foreign affiliate. Read our 2022 Federal budget summary for more information.


The substantive CCPC rules have not been enacted as of the date of this article. If enacted, the rules could have a significant impact on share transactions involving non-resident or public corporations—we can help you navigate them. Contact your local advisor or reach out to us here.


The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.