Associated corporations
Under section 256 of the Income Tax Act, one corporation is associated with another in a taxation year if, at any time in the year, one controlled the other, both were controlled by the same person or group, or certain related-person control and share tests are met. Associated Canadian-controlled private corporations share one business limit.
You meet associated corporations when an owner has more than one company, or a buyer already owns another business. The test turns on control, which the Act describes as control "directly or indirectly in any manner whatever". The CRA’s guide adds that a group of persons can be formed by any two or more persons, and the members do not need to act together or have any connection to each other.
Why it matters
Section 125 sets one business limit for the small business deduction. Under subsection 125(2), a corporation associated with one or more other Canadian-controlled private corporations has a limit of nil except as otherwise provided in section 125, including where all of them file an agreement in prescribed form assigning percentages under subsection 125(3). The CRA says the corporations must also complete Schedule 23 to document the allocation.
What to ask
- Which corporations each owner, and each family member, controls
- Whether the paragraph 256(1)(c) to (e) share-ownership tests are met
- Whether an allocation agreement has been filed for the year
A buyer should ask the same of its own holdings; see the answer on carrying the deduction over.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentHow certain relationships affect the small business deduction and SR&ED investment tax credits
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