Understanding Control and Associated Corporations under the Income Tax Act
When determining whether corporations are “associated” under the Income Tax Act (ITA), the Canada Revenue Agency (CRA) focuses on who controls them. The rules are complex and technical, but they carry significant tax consequences, especially for small business deductions, Employment Health Tax (EHT) exemptions, and corporate group planning.
What Are Associated Corporations?
Under subsection 256(1) of the ITA, one corporation is considered associated with another if:
- One controls the other;
- Both are controlled by the same person or group;
- Each is controlled by a related person who owns at least 25% of each; or
- A related person and a related group control the corporations together and meet certain share ownership thresholds.
The term “control” includes both legal (de jure) control and factual (de facto) control. The rules apply broadly, and the CRA may group corporations together even if they appear separate on paper.
Who Is a “Person” or “Group of Persons”?
The ITA defines “person” to include corporations, partnerships, trusts, and individuals (s. 248(1)). A group of persons, per subsection 256(1.2), includes any two or more persons who each own shares in a corporation. Importantly, a group may be considered to exercise control even if each person owns only a minority interest.
De Jure vs. De Facto Control
1. De Jure Control (Control in Law)
This form of control is based on share ownership. Typically, owning more than 50% of the voting shares gives a person de jure control.
In Silicon Graphics Ltd. v. Canada, 2002 FCA 260, the Federal Court of Appeal clarified that a “group of persons” only exercises de jure control if they act with a common link or intention to control the corporation. However, in administrative practice, both the CRA and Ontario often treat two or more persons who collectively own more than 50% of the voting shares as having de jure control, even without clear evidence of concerted action.
2. De Facto Control (Control in Fact)
Even without a majority of voting shares, a person may still have de facto control. Subsections 256(5.1) and (5.11) provide that a person has de facto control if they have direct or indirect influence that, if exercised, would result in control over the corporation. Courts look at:
- Influence from agreements, such as supply, management, or franchise contracts;
- Shareholder or board arrangements; or
- Actual power to influence or replace directors.
In McGillivray Restaurant Ltd. v. Canada, 2016 FCA 99, the Court held that de facto control requires real, ongoing ability to influence the board or shareholders, not just involvement in day-to-day operations.
Practical Impact: Employment Health Tax
The Employer Health Tax Act (EHTA) incorporates these association rules. If multiple employers are associated, they must share a single EHT exemption (s. 2.1). This often becomes a costly trap if the parties aren’t aware they’re “associated” in the eyes of the law.
Why This Matters
Associated corporations must:
- Share the $500,000 small business deduction limit;
- Share EHT exemptions; and
- May be subject to combined income testing for certain tax credits or phaseouts.
Failure to recognize association can lead to CRA reassessments, penalties, or denial of tax benefits.
Kirshen Tax Law Can Help
At Kirshen Tax Law, we advise business owners and corporate groups on how control and association rules under the Income Tax Act impact their tax obligations. Whether you’re structuring new entities or responding to an Ontario or CRA audit, we can help you navigate complex de jure and de facto control issues with confidence.
Call us today for a free consultation with an experienced Toronto tax lawyer who understands how to manage the risks of associated corporations and CRA reassessments.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.