47 What are the associated company rules? How do they impact the small business deduction? Why do they exist?

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 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:

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 (Author: Navjot Lalli, January 2020)

Interactive content (Author: Spencer Sin, January 2020)

References and Resources:

• ITA – 256(1)

January 2020