The Income Tax Act uses many different terms to refer to specific stakeholder relationships. Although they may have the same connotation, these terms are legally distinct from each other and carry different tax implications. This text provides only a brief overview as to what constitutes a specific relationship and the relevant tax treatment. For more information, refer to the Income Tax Act sections referenced.
Affiliated Persons – ITA 251.1 (relevant to superficial losses)
Individuals that are married or in a common-law partnership are affiliated.
Corporations that are under the control of affiliated persons or groups of affiliated persons are affiliated (each member of each group must be affiliated with at least one member of the other group).
Affiliated persons are subject to superficial loss rules. When a loss is realized on the disposal of capital property, it is deemed superficial and no deduction can be made if the following conditions are met:
- The seller or ‘affiliated person’ sells the property
- The seller of ‘affiliated person’ re-acquires the property 30 days before or after the sale
Associated Persons – ITA 256(1) (relevant to small business deductions)
Corporations are associated under any of the following scenarios:
- A corporation has control over the other
- Each corporation is under the control of the same person or group of persons
- Each corporation is under the control of a different person, the persons are related, and either of those persons owns at least 25% of shares of both corporations
Association impacts a corporation’s ability to claim a small business deduction. A Canadian-controlled private corporation (CCPC) is entitled to a reduction in corporate taxes on annual active business income up to the corporation’s business limit ($500,000 as of 2019). However, if the corporation is associated with another CCPC, the business limit is reduced to zero. If the associated corporations file an agreement with the minister, then the small business deduction can be shared among the associated corporations. This treatment stops individuals from claiming multiple deductions by setting up and splitting income across multiple corporations.
Related Persons – ITA 251(2) (relevant to non-arm’s length transactions and lifetime capital gain exemptions)
Individuals connected by a blood relationship or marriage/common-law partnership are related. A blood relationship refers to a relationship between parent and child (including adopted children, stepchildren, and children-in-law) or other descendants (ex. grandchildren). It also refers to a relationship between siblings.
A corporation and its controller(s) or any person related to its controller(s) are related.
Corporations are related if they have the same controller or if their controllers are related.
Related persons are automatically deemed to be dealing at non-arm’s length with each other.
For non-arm’s length transactions that aren’t at FMV (or a gift), the seller must record the transaction at the greater of FMV and actual selling price, and the buyer must record the transaction at the lesser of FMV and actual price. This treatment maximizes capital gains for the seller and minimizes CCA deductions or maximizes future capital gains for the buyer.
Related persons can also reduce their capital gains through the lifetime capital gain exemption (LCGE). Capital gains can be tax-exempt if it arose from the disposition of qualified small business corporation shares or qualified farm or fishing property. During the period from 24 months before to the time of disposal, the property must have been owned by the seller or a person related to the seller.
Connected Persons – ITA 186(4) (relevant to inter-corporate dividends)
Corporations are connected under any of the following scenarios:
- A corporation has control over the other
- A corporation owns more than 10% of issued share capital of the other
- A corporation owns more than 10% FMV of all issued shares of the other
Whether a corporation is connected or not has a significant impact on the way the inter-corporate dividends are taxed. This will be addressed later on in the textbook.
Interactive content (Author: Daljinder Nijjar, January 2020)
Interactive content (Author: Manu Grewal, January 2020)
References and Resources:
- ITA s.54 Definitions – superficial loss
- ITA s.110.6 Capital gains deduction
- ITA s.125 Small business deduction
- ITA s.186 Part IV tax on taxable dividends received by private and subject corporations
- ITA s.251 Arm’s length and related persons
- ITA s.251.1 Affiliated persons
- ITA s.256 Associated corporations and acquisition of control