Associated corporations

Association is about control, not just ownership

The CRA says association is based on control, and control can be exercised directly or indirectly in any way. A person can be an individual or a corporation, and a group of persons can control a corporation too. Control includes legal control, based on owning enough voting shares, and factual control, where someone has real influence even without a majority.

In general, corporations are associated if they meet one of six conditions at any time in the tax year. The simplest is that one controls the other. Others cover companies controlled by the same person or group, and several family-style combinations in which related controlling persons hold at least 25% of the shares of any class, other than specified classes, of one or both companies. A sixth rule can link two companies through a third corporation.

An illustrative example

Suppose one owner holds all the shares of an operating company and a separate holding company, and the operating company owns 100% of a property company. The same person controls all three, so they are associated. If they are all CCPCs, they share one $500,000 business limit between them, not $500,000 each. The corporations can agree how to divide it, though the percentages cannot add up to more than 100%. This is illustrative; family and shareholder structures vary.

The consequences for your return

Associated CCPCs file Schedule 23 to allocate the business limit, and Schedule 9 lists related and associated corporations. Only one of the associated corporations needs to file Schedule 23 for a calendar year, but the CRA will ask for it if it is missing when a return is assessed. If a tax year is shorter than 51 weeks, the allocated limit is prorated by days.

Association also feeds other calculations, including the due date for the balance of tax and the reduction of the business limit for passive income, which is measured across the associated group.

Common mistakes

A frequent assumption is that setting up a second company for a spouse or family member multiplies the limit. Family relationships can create association in several of the six conditions, so spouses, siblings and parents holding shares in different companies deserve a careful look. Another is overlooking a corporation that becomes associated part-way through the year, since the test applies at any time in the year. There is an election, filed on Schedule 28, that can change how two companies associated only through a third corporation are treated for the small business deduction, but it has conditions.

What to discuss with your accountant

Bring a list of every corporation that you, your spouse or your close family members own or control, with percentages and share classes. Mention planned reorganizations, share transfers or new companies before they happen. Ask how the business limit is being allocated and who files Schedule 23.