Related-party transactions
A related-party transaction is a dealing between a business and a person connected to it, such as an owner’s family member. The CRA says related persons are not considered to deal with each other at arm’s length, so a buyer can check whether the terms match an arm’s-length deal.
In a small business sale, related-party transactions are the rent, wages, loans or purchases that pass between the business and the people around it. The CRA describes an arm’s-length transaction as one between unrelated persons who act in their own separate interests, and says related persons are not considered to deal with each other at arm’s length. Its examples of related persons include individuals connected by blood relationship, marriage, common-law partnership, or adoption (legal or in fact), and it says a corporation and another person, or two corporations, may also be related persons.
Why they matter to earnings
BDC lists non-market rent among the items adjusted for when EBITDA is restated. Where rent or another price was set between connected parties, ask whether it matches what an unrelated party would pay, and see market rent adjustment and the answer on below-market related-party rent.
What to ask
- Which contracts, wages or loans involve the owner, family or companies the owner controls
- Whether each one is in writing and what it says about price
- Whether the terms match what an unrelated party would agree to
- Whether the arrangement continues after closing
The CRA points to Income Tax Folio S1-F5-C1 for who counts as related. Other settings may define related parties differently.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentRental Income
- 02Business Development Bank of CanadaGovernmentWhat is EBITDA?
- 03Business Development Bank of CanadaGovernmentHow to conduct due diligence when buying a business
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