Associated-company rules

To prevent taxpayers from creating more than one corporation to enjoy the benefits of the small business deduction, there are rules that require the small business limit to be shared among associated companies. The concept of associated companies is a common one in the Income Tax Act and the definition, like that of many other tax rules, is quite complex. The simplest cases are those in which companies are under common control or one company controls the other.

The concept of control is quite far-reaching, yet it’s possible for related persons to invest in each other’s companies and still remain non-associated. For example, a limited amount of cross-ownership is acceptable (generally, less than 25%). Also, certain types of shares, known as shares of a specified class, are specifically excluded in determining control and cross-ownership.

Tax tip: Do you have an interest in one or more companies that are related to each other or to other companies? If so, have your tax adviser review the corporate structure to see whether you’re deemed to be associated and whether there are ways to prevent association.