Frankie Fenton CMA

Associated Corporations

There are a number of areas in the tax legislation where the concept of “association” in reference to two or more corporations becomes relevant.  For example, associated corporations:

  • must share the Small Business Deduction between all members of the associated group;
  • will not be viewed as providing personal services to one another;
  • can lease real property to one another, and have the associated income treated as active business income rather than inome from property;
  • one of which is a developer, must share the Base Level Deduction in respect of interest and property taxes on vacant land; and
  • must share the SR&ED Business Limit  between all members of the associated group.

There is a distinction between “related” corporations and “associated” corporations.   Two corporations may be related, but not not necessarily associated – the distinction largely rests on the extent of common control.   Whether corporations are related depends simply on the relationship between owners.

Two corporations are associated if they share common control.  De jure control  generally comprises 50% or more of the voting control, but control can also refer to de facto control where a particular person holds less than 50% of the votes, but exerts control in some other manner such as by possessing significant influence.  A related group can together control a corporation. There are also some provisions which deem control to exist in certain circumstances, and as a result a corporation can be controlled (or so deemed) by more than one person or group at the same time.  Therefore, there are several permutations that must be considered.

Accordingly association is something that owners of corporations can fall into rather unwittingly.  The most common example is in the drafting of shareholder agreements.   Where a person has a right to shares in a corporation or a right to acquire shares in a corporation, that person is deemed to have done so for purposes of the control test, with certain specific exceptions.

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