Tax and accounting terms
Associated Corporations Explained: Sharing One Small Business Limit
$500,000of active business income qualifies for the small business deduction each year, and associated corporations share that one limit instead of each claiming it.
Sources checked October 20263 min read
Why association matters
Every CCPC can claim the small business deduction on up to $500,000 of active business income a year. Without a rule to stop it, an owner could multiply that limit by running one business through several corporations. The association rules close that door: corporations that are associated share one business limit.
Association reaches beyond the small business deduction. It decides whether a corporation has two or three months to pay its balance of tax, it adds up taxable capital and passive investment income across the group when the limit is reduced, and it shares the expenditure limit for the 35% SR&ED credit.
Key points
- Corporations linked by control, or by related owners holding 25% of a class of shares, are associated
- Associated CCPCs share one small business limit
- The split is agreed on Schedule 23, in percentages that total no more than 100%
- Association also decides when tax is due and shares the SR&ED expenditure limit
The six association tests
Two corporations are associated if they meet any one of these conditions at any time in the tax year. Control means control directly or indirectly in any way, which includes factual control as well as voting control. The 25% tests do not count shares of a specified class, a narrow category of non voting preferred shares defined in the Income Tax Act.
| Test | Corporations are associated when |
|---|---|
| 1 | One corporation controls the other |
| 2 | Both are controlled by the same person or group of persons |
| 3 | Each is controlled by one person, the two people are related, and one of them owns at least 25% of a class of shares of each corporation |
| 4 | One is controlled by a person who is related to every member of the group controlling the other, and who owns at least 25% of a class of the other's shares |
| 5 | Each is controlled by a related group, every member of one group is related to every member of the other, and people in both groups own at least 25% of a class of shares of each |
| 6 | Each is associated with the same third corporation |
Family members, minor children and options
People are related by blood, marriage, common law partnership or adoption, so parents and children, siblings, and spouses who each run their own corporation can be caught by the tests above. Two brothers who each control a company become associated as soon as one of them owns 25% of a class of shares in the other's company.
Shares owned by a child under 18 are treated as owned by a parent when testing association with a corporation that parent controls, unless the child manages the corporation without significant influence from the parent. A right to acquire shares, such as an option or a purchase agreement, can be treated as already exercised. Testing association before shares are issued is far easier than unwinding it afterwards.
Splitting the limit on Schedule 23
Associated CCPCs agree how to divide the business limit on Schedule 23. Each corporation is given a percentage, and the percentages cannot total more than 100%. An operating company allocated 80% and a holding company allocated 20% would have business limits of $400,000 and $100,000. Only one corporation in the group needs to file the schedule for a calendar year, though the CRA will ask for it if none is on file when it assesses a return for that year.
A corporation whose tax year is shorter than 51 weeks prorates its share by the number of days in the year over 365. Where a corporation has two tax years ending in the same calendar year, its limit for the second is the lesser of the two amounts allocated to it, so a short year cannot be used to claim more than the group's full limit in one calendar year.
Quick answers
Do associated corporations each get a $500,000 limit?
No. They share one business limit, divided among them on Schedule 23 in percentages that total no more than 100%.
Are a holding company and the operating company it owns associated?
Yes, when the holding company controls the operating company. One corporation controlling the other is the first association test.
Are corporations owned by two siblings associated?
Not automatically. If each sibling controls a separate corporation, they are associated only if one of them also owns at least 25% of a class of shares of the other's corporation, not counting shares of a specified class.
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.