by Eric Miller

by Kendal Steele

AccountingJanuary 28, 20210 comments

The Corporate Association Rules

If a Canadian-controlled private corporation (“CCPC”) is associated with one or more CCPCs, subsection 125(3) of the Income Tax Act (the “Act”) provides that all the CCPCs must file with their tax returns an agreement under which the Small Business Deduction limit of $500,000 is allocated amongst them. For this reason, subsection 125(3) can pose a tax disadvantage to small business owners seeking to associate their business with others.

What does Associated Mean?

“Association” is a technical term under the Act, and the essential rules regarding whether two corporations are “associated” are found under subsection 256(1).

Under subsection 256(1)(a), two corporations are associated if, at any time during the year, one corporation controls the other. “Control” is another technical term under the Act. For the purposes of this blog post, “control” refers to indirect or direct control. Under paragraph 256(1)(a), control of one corporation by another could arise, for example, if one corporation owns more than 50% of the voting shares of another corporation.

Under subsection 256(1)(b), two corporations are associated if, at any time during the year, both corporations are controlled by the same person or group of persons. This means that two corporations could be associated even if a business owner has a 100% share over one corporation and only a 51% share over another.

Under subsection 256(1)(c), two corporations are associated if, at any time during the year, one of two related persons, who together control both corporations, has at least a 25% share of one of the corporations. This means that two corporations could be associated even if a business owner has a 100% share in one corporation and only a 25% share of his spouse’s corporation. Similarly, paragraph 256(1)(c) would apply to a business owner who has a 100% share in a corporation that has a 25% share of the corporation controlled by that business owner’s spouse.

Under subsection 256(1)(d), two corporations are associated if, at any time of the year, a person who controls one of the corporations, and who is related to each member of a group of persons who together control the other corporation, has at least a 25% share of that group’s corporation. This means that even if, for example, the ownership of one corporation were to be evenly divided amongst a business owner’s spouse and children, the corporation over which that business owner has control would be associated with the corporation over which the business owner’s spouse and children have control so long as that business owner has at least a 25% share.

Similarly, under subsection 256(1)(e), two corporations are associated if, at any time of the year, at least one of the persons of a group of persons, who are all related to each other and who together control one of the corporations, has at least a 25% share of a corporation controlled by another group of persons each member of which is related to each other and to every member of the first group.

Association – Example

Suppose, for example, a spousal couple together controlled a corporation and their three children each held a 25% share of another corporation. The two corporations would be associated under paragraph 256(1)(e) if a spouse held the remaining 25% share of the children’s corporation. However, if the couple had four children who each held a 20% share of a corporation, this corporation would not be associated if a spouse only held the remaining 20% share of the children’s corporation. This is because paragraph 256(1)(e) applies only if a person holds at least a 25% share of a corporation controlled by a related group of persons.

“Association” and “control” are technical terms under the Act, but small business owners can use these technicalities to their advantage. They have important consequences for the legal use of the Small Business Deduction. Any small business owners seeking to associate their business with another should consider the above provisions and subsection 125(3) of the Act. If you are a small business owner seeking to review the rules of association, or if you are simply interested in learning more about using the Small Business Deduction to your advantage, contact a lawyer at R&A Tax Law today! We are here to help!

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.