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Associated corporations

In the Income Tax Act, association is relevant to the:

(i) allocation of small business deduction limit between CCPCs

(ii) determination of an active business income as it relates to a specified investment

business, personal services business or intercompany rent payments

(iii) calculation of the Investment Tax Credit

In determining whether two corporations are associated, it is helpful to draw a diagram.

Notation Description

CorpA - corporation

P - person (individual or corporation)

GP - group of persons

RGP - related group of persons

- direction of control

- direction of share ownership

There are seven ways corporations can be associated, of which five are described in Subsection 256(1):

Paragraph Description Diagram

(a) one corporation controls the other CorpA

CorpB

(b) both corporations are controlled by

the same person or group of persons

P or GP

CorpA CorpB

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8/2/2019 404 Associated Corporations

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Paragraph Description Diagram

(c) - each corp controlled by a person

- persons are related

- one person owns 25% of the

issued shares of any class of capital

stock of each corp (other than a

specified class)

P related to P

25%

Corp A 25% Corp B

(d) - one corp controlled by a person

- one corp controlled by a group of

persons (related or unrelated)

- person related to every member of a

group of persons

- person owns 25% of the issued

shares of any class of capital stock of

other corp (other than a specifiedclass)

P related to GP

Corp A 25% Corp B

(e) - each corp controlled by a related

group

- members of one related group

related to all the members of the

other related group

- one or more persons who are

members of both related group, either

alone or together, own 25% of the

issued shares of any class of capitalstock of each corporation (other than

a specified class)

RGP related to RGP

member

P

Corp A 25% 25% Corp B

There are two other ways corporations can be associated:

Subsection 256(2) - Association through a third corporation

- applies where corporations are not associated per subsection 256(1)

- if each corp is associated to a common third corp, then they are deemed to be associated

- relief from this deeming rule is available if the common third corp is not a CCPC

- in this case, the third corp can annually elect not to be associated to either corp- as a result, the two corps are not associated, however, the business limit of the third corp becomes nil

Subsection 256(2.1) - Anti-avoidance provision

- applies where corporations are not associated per subsections 256(1) and (2)

- corporations will be deemed to be associated if one of the main reasons for their separate existence is

tax avoidance

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