9.9 What are the associated company rules? How do they impact the small business deduction? Why do they exist?
Amaneet Dhudwal
Associated Companies
The $500,000 business limit must be shared amongst associated CCPC’s. If this rule did not exist, then corporations would max their small business deduction (SBD) limit at $500,000 then open and transfer excess active business income into another corporation and max their SBD deduction there.
One corporation is associated with another in a taxation year if: (ITA 256(1))
- One of the corporations is controlled indirectly or directly by the other corporation – ITA 256(1)(a)
- Both of the corporations were controlled indirectly or directly by the same person or group of persons – ITA 256(1)(b)
- Each of the corporations were controlled indirectly or directly by a person; and the person who controlled one of the corporations was related to the person who controlled the other; and one of them has to own at least 25% of the shares of each corporation – ITA 256(1)(c)
- One of the corporations were controlled indirectly or directly by a person; and that person was related to each member of a group of persons that controlled the other corporation; and that person owns at least 25% of the shares of the other corporation – ITA 256(1)(d)
- Each of the corporations was controlled indirectly or directly by a related group; and each member of one of the groups was related to all the other members of the other group; and one or more persons who are members of both related groups (either alone or together) own at least 25% of the shares of each corporation – ITA 256(1)(e)
These rules are put into place to prevent companies from taking advantage of the small business deduction.
Example 9.9.1
If associated company rules did not exist:
Corporation X has $1,000,000. They would be able to use the maximum business limit of $500,000 with Corporation X and then set up a subsidiary corporation (ex. Corporation Y) and transfer up to half of their business ($500,000) to the subsidiary corporation to double-dip on the Small Business Deduction.
Illustration 1:
|
CORPORATION X |
|
Amount: $1,000,000 |
|
Corporation X |
Corporation Y |
|
$500,000 |
$500,000 |
With the association rules, Corporation X and Y are associated (as Corp X directly control Corp Y) and must decide how they want to allocate the $500,000 Small Business Deduction limit. i.e. Corporation X could take $300,000 and Corporation Y could take $200,000. This can be shared however they like, but the total amount amongst the associated companies cannot exceed $500,000.
Interactive Content
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References and Resources
- Income Tax Act, RSC 1985, c1, (5th Supp.) s 256(1)
“What are the associated company rules? How do they impact the small business deduction? Why do they exist?” from Intermediate Canadian Tax Copyright © 2021 by Amaneet Dhudwal is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
