Budget 2022: Substantive CCPCs and share transactions involving a non resident or public company

April 29, 2022 | Carolyn S. Inglis, Colleen Ma

The 2022 Federal Budget was tabled in the House of Commons on April 7, 2022 (“Budget Day“) by the Honourable Chrystia Freeland, Canada’s Deputy Prime Minister and Minister of Finance. A summary of the personal income tax measures, business income tax measures, international tax measures, sales tax measures and funding increases for the Canada Revenue Agency can be found in our 2022 Federal Budget Review. Changes applicable to registered charities can be found in the 2022 Federal Budget Edition of our Social Impact Newsletter.

This article focuses on the Budget’s introduction of a new concept – the “substantive CCPC” (Canadian‑controlled private corporation) – and its potential impact on certain tax plans that have been used in the context of corporate share acquisitions by a non‑resident or public company.

Substantive CCPCs and proposed measures

As announced in Budget 2022, generally, a substantive CCPC is a private corporation that is resident in Canada and is not otherwise a CCPC but which is ultimately controlled in law or fact by one or more Canadian resident individuals. This includes circumstances where the corporation would have been a CCPC but for the fact that a non‑resident or public corporation has a right to acquire its shares (e.g., pursuant to an executed share purchase agreement).

Generally, a CCPC is subject to a refundable tax on certain types of investment income and taxable capital gains. The initial combined federal and provincial tax rate on such passive income ranges between 46.7% and 54.7%, depending on the relevant province. In contrast,  the combined federal and provincial  tax rate for passive income earned by a non‑CCPC ranges between 23% and 31%. A corporation that is a substantive CCPC will now generally be subject to the same refundable tax rates on all of its investment income and taxable capital gains as if it were a CCPC. However a substantive CCPC would remain a non‑CCPC for other purposes of the Income Tax Act (Canada) (the “Tax Act“).

Impact on share acquisitions

When a CCPC is being acquired by a non‑resident or a public company, the target corporation loses its CCPC status on the signing of the share purchase agreement by virtue of the purchaser having the right to acquire all of the target’s shares. In this situation, a tax planning technique was for the target to make a designation under paragraph 111(4)(e) of the Tax Act, which provides for the ability to trigger a capital gain on the disposition of capital property (typically goodwill) that is deemed to have been disposed of upon the change of control. The designation is made subsequent to the execution of the share purchase agreement, but prior to the closing of the share sale. Because the target corporation is not a CCPC during this period, the capital gain arising from an election filed pursuant to  paragraph 111(4)(e) election is taxed at the lower non‑CCPC tax rate. As a consequence, an amount is added to the target’s capital dividend account, and there is an increase to the target’s safe income on hand.

On the day the transaction closes, but before the effective time in the purchase agreement, the target would typically: (1) increase its legal stated capital resulting in a deemed dividend, which the target elects to be a capital dividend; and (2) increase its legal stated capital resulting in a deemed taxable dividend to be paid out of safe income. An amount equal to the increase in stated capital is then added to the shareholder’s adjusted cost base and the paid‑up capital of the shares of the target. From the purchaser’s perspective, a downward adjustment to the purchase price is negotiated to account for the income tax liability triggered by the capital gain arising in the target as a result of the 111(4)(e) designation, and the purchaser acquires the target with a “stepped‑up” tax cost in the capital property of the target (typically goodwill) that was subject to the designation.

The new substantive CCPC rules appear to limit the effectiveness of this type of planning. Subject to the grandfathering rules, where the target makes a designation under paragraph 111(4)(e), the resulting taxable capital gain will be taxed at the higher refundable tax rate. The target will be entitled to a dividend refund when sufficient dividends are paid out by the target to its shareholders; however such dividends must be taxable dividends. This refund should be considered by the parties when making adjustments to the purchase price. To the extent that the target elects the deemed dividend to be a capital dividend, it will not trigger a dividend refund.

The substantive CCPC rules will generally apply to taxation years that end on or after Budget Day. There is some limited grandfathering for genuine commercial transactions entered into before Budget Day where a deemed year‑end is triggered by an acquisition of control to an arm’s length purchaser, the purchase and sale agreement was entered into before Budget Day, and the share sale occurs before the end of 2022.

Importantly, this grandfathering provision does not appear to apply where the key terms of an agreement are settled in a letter of intent, with the parties expecting a particular tax result, but the definitive purchase and sale agreement is still subject to negotiation. Parties that are mid‑transaction will need to carefully review how the substantive CCPC rules affect their transaction and quickly consider their options.

There may be some situations where this type of planning continues be beneficial. For example, the capital gain triggered on the paragraph 111(4)(e) designation could be used to offset capital losses of the target that may otherwise be unavailable following the acquisition (as there would be a “loss restriction event”). This appears to be consistent with the original intent of this paragraph when it was introduced in 1987, which was stated to be to realize capital gains that could be offset by capital losses of the corporation for pre-acquisition taxation years.


The proposed substantive CCPC rules may impact many ongoing transactions that involve share sales of CCPCs to a non‑resident or a public corporation. For parties that are mid‑transaction but do not fall within the grandfathering rules, the parties should carefully review these rules and consider how they may effect any current tax planning strategies that are being developed. For future transactions, making a paragraph 111(4)(e) designation may still be a viable tax planning tool but other options should also be canvassed.

If you would like to discuss tax planning strategies for the purchase or sale of a Canadian business, please contact a member of the Miller Thomson LLP Corporate Tax team.


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