Types of Corporations in Canada: Avoiding Audit Pitfalls

Barbara Britto

Choosing the right corporate structure is one of the most important decisions a small business owner can make. It affects everything from taxes and liability to access to funding and long-term growth. In Canada, corporations are classified differently for tax purposes, each with unique implications. This article breaks down the major types of corporations relevant to small businesses, including two specialized categories: Personal Services Businesses and Specified Investment Businesses.

Common Types of Corporations in Canada

1. Canadian-Controlled Private Corporation (CCPC)

Definition: A private corporation that is resident in Canada and not controlled by non-residents or public corporations.
Benefits:

• Eligible for the Small Business Deduction (SBD), reducing the corporate tax rate on active business income.
• Access to refundable investment tax credits for R&D. Ideal for: Most small businesses incorporated in Canada.

2. Other Private Corporation

Definition: A private corporation that does not meet CCPC criteria.
Tax Implications: May not qualify for the same tax benefits as CCPCs.
Ideal for: Businesses with foreign ownership or public affiliations.

3. Public Corporation

Definition: A corporation whose shares are listed on a designated stock exchange.
Ideal for: Larger businesses seeking public investment.

4. Corporation Controlled by a Public Corporation

Definition: A subsidiary of a public company.
Ideal for: Businesses operating under a larger corporate umbrella.

Note: Active business income is generally income earned from regular business operations. Income from a Specified Investment Business or a Personal Services Business, as well as certain types of specified corporate income, is typically not eligible for the Small Business Deduction.

Personal Services Business (PSB)

What Is It?

A Personal Services Business is a corporation that provides services that would normally be performed by an employee, but through a corporate structure. The CRA considers a corporation a PSB if the individual performing the work would otherwise be viewed as an employee.

Key Characteristics:

• Services are provided to a single client.
• The individual is essentially an incorporated employee.
• Fewer than five full-time employees.

Tax Implications:

• No access to the Small Business Deduction.
• Limited expense deductions.
• Higher tax rates may apply.

Example:
An IT consultant who incorporates but works exclusively for one company may be classified as a PSB.

T4A Reminder:
When a corporation is paid for services outside an employment relationship, the payer must issue a T4A slip for fees or other amounts paid. Depending on the situation, a T4A-NR, T5018, or T1204 may be required instead.

How to Avoid PSB Classification:

• Work with multiple clients.
• Demonstrate independence (control over work schedule, tools, and location).
• Employ five or more full-time employees.

Specified Investment Business (SIB)

What Is It?

A Specified Investment Business earns income primarily from property—such as rent, interest, dividends, or royalties. This income is not considered active business income unless the corporation employs more than five full-time employees.

Key Characteristics:

• Income is passive.
• Limited access to the Small Business Deduction unless employee thresholds are met.

Tax Implications:

• No Small Business Deduction without sufficient staffing.
• Higher tax rates on passive income.

Example:
A holding company earning rental income from properties with no active operations or employees.

Choosing the Right Structure

When selecting a corporate structure, consider:

• Nature of income: Active vs. passive.
• Ownership and control: Canadian vs. foreign.
• Employment model: Independent contractor vs. incorporated employee.
• Growth plans: Expansion, public listing, asset holding.

Bottom Line:  Consulting a tax professional or legal advisor is highly recommended to ensure compliance and avoid unexpected tax consequences. Understanding the nuances between corporate types—especially specialized categories like PSBs and SIBs—helps small business owners make informed, strategic decisions. Whether launching a startup or restructuring an existing business, choosing the right corporate type is a foundational step toward long-term success.