Download - 404 Associated Corporations
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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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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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