In addition to the various schedules required to support the income tax computations applicable to the T2 corporate tax return, all corporations are required to disclose whether or not they are related or associated with at least one other corporation. Subsection 251(2)(c) provides that two corporations will be related if:
- the two corporations are controlled by the same person or group of persons;
- each of the corporations is controlled by one person and the person who controls one corporation is related to the person who controls the other corporation;
- one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation;
- one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation;
- any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation; or
- each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.
Two corporations may not be associated even though they are related. Subsection 256 (1) provides that one corporation is associated with another in a taxation year if, at any time in the year,
- one of the corporations controlled, directly or indirectly in any manner whatever, the other;
- both of the corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons;
- each of the corporations was controlled, directly or indirectly in any manner whatever, by a person and the person who so controlled one of the corporations was related to the person who so controlled the other, and either of those persons owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof;
- one of the corporations was controlled, directly or indirectly in any manner whatever, by a person and that person was related to each member of a group of persons that so controlled the other corporation, and that person owned, in respect of the other corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof; or
- each of the corporations was controlled, directly or indirectly in any manner whatever, by a related group and each of the members of one of the related groups was related to all of the members of the other related group, and one or more persons who were members of both related groups, either alone or together, owned, in respect of each corporation, not less than 25% of the issued shares of any class, other than a specified class, of the capital stock thereof.
Both concepts of “related” and “associated” are crucially important in tax planning. Here are some instances where the concept of “related” will be applicable:
- One of the criteria to be eligible for lifetime capital gains exemption (LCGE) when selling shares of a qualified small business corporation (SBC) is that throughout the 24 months immediately preceding disposition of the shares, more than 50% of the fair market value of the assets of the corporation must have been used principally in an active business carried on primarily in Canada by the corporation or a corporation related to it. For illustration, consider this example: Mr. A owns all issued and outstanding shares of OPCO which is an SBC. OPCO operates from real property owned by REALCO, which is fully owned by Mr. A’s spouse. Therefore, OPCO and REALCO are related. Let’s assume that REALCO owns only one property with OPCO as the sole tenant. REALCO’s shares may meet the requirement of LCGE because its assets are used in an active business of its related corporation.
- A corporation is considered a large corporation if the total taxable capital employed in Canada at the end of the tax year for it and its related corporations is greater than $10 million. Taxable capital employed in Canada is used in the calculation of the Capital Tax on large corporations and is also used in determining the eligibility for small business deduction (SBD).
Two corporations can be “related” and still not be “associated” with each other. The other way is not possible. Here are some instances where the concept of “associated” will be applicable:
- To prevent taxpayers from creating more than one corporation to enjoy the benefits of the SBD, the Income Tax Act requires the small business limit to be shared among associated companies. If spouses each own their own corporations and there is a cross ownership of 25% required for associated companies, the two corporations will be associated. These two corporations, then, will be obliged to share the $500,000 small business limit.
- Passive income by an associated corporation can be qualified as an active business income (ABI), if this income is received by the other associated corporation. Referring back to the example above about OPCO and REALCO, the two corporations are related but not associated. Therefore, the rental income to REALCO from OPCO is not considered an ABI.
Leave a Reply
You must be logged in to post a comment.