Canadian Controlled Private Companies (CCPC's) receive a lower rate of corporate tax on business profits up to a certain threshold. However, this favourable rate does not apply to foreign business income which is taxed at the full higher rate of corporate tax. Why? Surely Canada should be encouraging its small companies to do business abroad.
I am aware of a situation where a relatively small service business with an international aspect has incorporated a company in the UK to transact its non-Canadian business. A major part of the rationale was the higher tax on foreign profits on CCPC’s levied by Canada. The UK has a roughly equivalent small business rate for profits up to a certain (significantly higher) threshold and this applies no matter where the profits are earned. (There is also no equivalent rule to “Canadian Control”, just the profit threshold.) The corporate structure in this instance is not straightforward and demonstrates the hoops that businesses must jump through and expense they must incur to be taxed fairly. “Fair” in this case does not mean avoid tax – it just means pay similar tax to comparable Canadian domestic corporations.
The bottom line here is that Canada loses out on tax on part of the global income on this operation. Better to pay no tax than pay less tax! There are other situations where Canada applies rules in an attempt to stop tax “leakage” and ends up severely handicapping businesses and/or getting no tax instead of some tax. (Some material for future blogs.) However, the situation in this blog does not even appear to have that logic behind it. I would welcome comments from readers – is there something I'm missing here?
I am certainly no defender of the UK tax system in general and will likely have plenty to say about that in future. However, the fact that I'm comparing the UK tax system favourably should in itself set off alarm bells somewhere.
This appears as yet another example of a self serving Canadian tax system - one that has been developed piecemeal by bureaucrats and politicians who have no clue about what drives business.
