TaxCycle | Products | Pricing | Training | Documentation | Support | News

Associated CCPC question

Associated CCPC question, just want a second thought as it is very confusing:

Company A is controlled by a married couple (say person [a] and [b]; 50-50 share)

&

Company B is controlled by 5 individuals, the couple above, the person [a] and [b] each with 21% share - a total of 42% for this couple; person [c] is related to person [a] and [b] w/ blood related and with 15% share and the rest goes to person [e] and [f], whom are completely unrelated to person [a], [b], [c].

I don’t think they are associated under 256(1)(e) or any other 256 section.

For simplicity reason, please just ignore de facto control.

@kingsmen.assetmgt

Insufficient info.


(EXCERPT)

What is the “income of concern”?

The tax rules set out that income from an active business for the year earned by a CCPC from the provision of property or services (directly or indirectly, in any manner whatever) to a private corporation may be ineligible for the SBD if:

At any time in the year, the corporation (or one of its shareholders) or a person who does not deal at arm’s length with the corporation (or one of its shareholders) holds a direct or indirect interest in the private corporation, and
All or substantially all of the corporation’s income for the year from an active business is not from the provision of property or services to:
    Persons (other than the private corporation) with which the corporation deals at arm’s length, or
    Partnerships with which the corporation deals at arm’s length, other than a partnership in which a person that does not deal at arm’s length with the corporation holds a direct or indirect interest.

In general terms, if all or substantially all of a corporation’s ABI is earned from arm’s length sources, these rules should not be a concern. However, if all of the conditions above are met, it will be necessary to determine if the income is ineligible for the SBD or if an exception applies.

Need answers to the following conditions:-

EXCERPT

https://www.bdo.ca/en-ca/insights/tax/tax-articles/key-considerations-on-the-new-small-business-deduction-denial-rules/

Key issues of concern

As is evident from the discussion above, the new SCI rules are complex and very broad. The following discussion highlights a number of issues that have arisen concerning the application and interpretation of the rules.

Providing property or services, directly or indirectly – The starting point for determining whether the SCI rules apply is whether a CCPC is earning ABI from the provision of property (for example, a loan or real property) or services, directly or indirectly, in any matter whatever, to a private corporation. The wording “directly or indirectly, in any matter whatever”, makes this starting point quite broad. In particular, whether income is earned indirectly, in any manner whatever, means it is necessary to take a thoughtful look at sources of income to determine if income could be considered earned indirectly from a private corporation. It would be useful for the Canada Revenue Agency (CRA) to provide guidance to taxpayers on how broadly this term should be interpreted.

Direct or indirect interest condition – As set out in the rules above, when a CCPC (or one of its shareholders) or a person who does not deal at arm’s length with the CCPC (or one of its shareholders) holds a direct or indirect interest in the private corporation that is receiving the provision of property or services, the SCI rules may apply. One may generally assume that the reference to a direct or indirect interest refers to holding shares of the private corporation directly or through another entity. However, the phrase “direct or indirect interest” is not defined in the tax rules and there is no specific reference made to holding such an interest in the shares of the private corporation. As a result, there is a concern that this phrase could be interpreted broadly to include certain rights in the private corporation or possibly even a creditor’s interest. Whether the CRA would interpret the phrase in this way is not certain, and guidance would greatly help taxpayers and their advisors to properly apply the rules.

All or substantially all condition – As mentioned above, when a CCPC earns income from the provision of property or services to a private corporation, the SCI rules will not apply when all or substantially all of the CCPC’s active business for the year is from arm’s length sources. The CRA generally interprets the phrase “all or substantially all” to mean 90% or more. Therefore, the condition will generally be met if more than 10% of ABI from the provision of property or services is earned from any non-arm’s length persons, and not just the private corporation in question. If this is the case, income earned from the private corporation may be subject to the new SCI rules.

There are a number of issues with this condition. First, in order to determine if this condition is met, one needs to be able to differentiate income that is earned from non-arm’s length versus arm’s length sources. Under the tax rules, related persons deal at non-arm’s length, while it is a question of fact whether persons who are not related are non-arm’s length. In the latter case, the situation and business relationship will need to be considered where an arm’s length relationship is not clear, and this can create some uncertainty for purposes of applying the rules.

Second, for purposes of determining whether the 90% threshold is met, it will be necessary to track non-arm’s length income from arm’s length income, which adds further compliance requirements for corporations dealing with the rules. A reference to income is generally understood to mean revenue net of expenses.

1 Like

See IT-64R4: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/it64r4-consolid/it64r4-consolid-e.pdf

Page 7: Paragraph 256(1)(e) provides another similar rule to those discussed above. Under paragraph 56(1)(e), two corporations are associated with each other if the following conditions exist:

  • Each corporation is controlled, directly or indirectly in any manner whatever, by a related group.
  • Each member of one related group is related to all the members of the other related group.
  • One or more persons who are members of both related groups own, in total, at least 25 per cent of the issued shares of any class—other than a “specified class” (discussed below after the example)—of the capital stock of each corporation.

In your example both corporations have a related group. And both groups control the respective corporations. You have to figure out what the phrase “One or more persons who are members of both related groups own, in total, at least 25 per cent” means.

@kingsmen.assetmgt

Interesting question!

According to Condition 5 below, the threshold of 25% is exceeded by this couple who own 42%.

Here is the CRA Reference

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-2-page-2-t2-return.html#P918_78391

Condition 5

The corporations are associated if all of the following apply:

  • each corporation is controlled by a related group
  • each of the members of one of the related groups is related to all members of the other related group
  • one or more persons who are members of both related groups, either alone or together, own at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of each corporation
Example

Anne and her two daughters control Corp One. Anne and her two sons control Corp Two. Anne owns 33% of the common shares in each corporation.

Corps One and Two are associated.

CONDITIONS 1 to 6
https://support.drtax.ca/dtmax/eng/kb/dtmax/Keywords/rc/curr/t2/rc/t2f_sch_009.htm

Schedule 9, Related and Associated Corporations

Complete Schedule 9 if the corporation is related to or associated with at least one other corporation.

Reference
Sections 251 and 256

When is a corporation associated?

Association is based on control. Control can be exerted either directly or indirectly in any way . A person or a group of persons can control a corporation. Keep in mind that, in this context, a person can be either an individual or a corporation.

Control includes both de jure control and de facto control. De jure control is the right of control that depends on a person owning enough shares of a corporation to give that person a majority of the voting power. De facto control , or factual control, occurs when a corporation is subject to any direct or indirect influencing that, if exercised, would result in actual control being exerted.

For tax years that begin after March 21, 2017, the determination of whether a taxpayer has any direct or indirect influence that, if exercised, would result in factual control of the corporation, shall meet both conditions:

  • take into consideration all factors that are relevant in the circumstances
  • not be limited to whether the taxpayer has a legally enforceable right or ability to make a change in the board of directors of the corporation, or the board’s power, or to exercise influence over the shareholder(s) who have that right or ability. The previous factors are not mandatory in determining factual control

In general, a corporation is associated with another corporation if it meets one of the following six conditions at any time in the tax year. Remember that controlled means directly or indirectly in any way.

Condition 1

The corporations are associated if one corporation controls the other.

Example

Corp X owns 100% of the voting shares of Corp Y, which in turn owns 51% of the voting shares of Corp Z.

Corp X is associated with Corp Y, because it exerts direct control over it.

Corp X is associated with Corp Z because it exerts indirect control over it.

Condition 2

The corporations are associated if both corporations are controlled by the same person or group of persons.

Corporations may be associated because the same group of persons controls both corporations, but the members of this group do not act together and have no other connection to each other.

CCPCs that are associated only because of this definition of a group will NOT be considered associated when:

  • calculating the refundable investment tax credit on eligible SR&ED expenditures
  • calculating the expenditure limit
  • allocating the expenditure limit

For this exception to apply, one of the corporations must have at least one shareholder who is not common to both corporations.

The corporations will continue to be associated for all other purposes of the Income Tax Act.

Example

Bob owns 40% of the voting shares of Corp ABC and 30% of the voting shares of Corp XYZ. Ike owns 20% of the voting shares of Corp ABC and 40% of the voting shares of Corp XYZ.

As a group, Bob and Ike control both companies. Corps ABC and XYZ are associated.

Condition 3

The corporations are associated if all of the following apply:

  • each corporation is controlled by one person
  • that person is related to the person controlling the other corporation
  • one of those persons owns at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of each corporation
Example

Billy owns 100% of the issued share capital of Corp AB. He also owns 25% of the class A shares (other than shares of a specified class) of Corp CD, whose controlling shareholder is Billy’s brother.

Corps AB and CD are associated.

Condition 4

The corporations are associated if all of the following apply:

  • one corporation is controlled by one person
  • that person is related to each member of a group of persons who controls the other corporation
  • that person owns at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of the other corporation
Example

Buddy controls Corp AY. His two daughters control Corp AZ. Buddy also owns 50% of the class A preferred shares of Corp AZ.

Corps AY and AZ are associated.

Condition 5

The corporations are associated if all of the following apply:

  • each corporation is controlled by a related group
  • each of the members of one of the related groups is related to all members of the other related group
  • one or more persons who are members of both related groups, either alone or together, own at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of each corporation
Example

Anne and her two daughters control Corp One. Anne and her two sons control Corp Two. Anne owns 33% of the common shares in each corporation.

Corps One and Two are associated.

Condition 6

Two corporations that are not associated with each other will be considered associated under subsection 256(2) if they are associated with the same corporation (the third corporation). Special rules apply for determining the small business deduction. See Schedule 28, Election not to be Associated Through a Third Corporation, on page 31 for details.

Example

Corp AB owns 100% of the issued share capital of Corp CD. It also owns 25% of the class A shares (other than shares of a specified class) of Corp XY, whose controlling shareholder is Billy. Billy’s brother controls Corp AB.

Corps AB, CD, and XY are associated.

SAMPLE EXAMPLES - CONDITIONS 1 TO 6

https://support.drtax.ca/dtmax/eng/kb/dtmax/Keywords/rc/curr/t2/rc/t2f_sch_009.htm

Schedule 9, Related and Associated Corporations

Complete Schedule 9 if the corporation is related to or associated with at least one other corporation.

Reference
Sections 251 and 256

When is a corporation associated?

Association is based on control. Control can be exerted either directly or indirectly in any way . A person or a group of persons can control a corporation. Keep in mind that, in this context, a person can be either an individual or a corporation.

Control includes both de jure control and de facto control. De jure control is the right of control that depends on a person owning enough shares of a corporation to give that person a majority of the voting power. De facto control , or factual control, occurs when a corporation is subject to any direct or indirect influencing that, if exercised, would result in actual control being exerted.

For tax years that begin after March 21, 2017, the determination of whether a taxpayer has any direct or indirect influence that, if exercised, would result in factual control of the corporation, shall meet both conditions:

  • take into consideration all factors that are relevant in the circumstances
  • not be limited to whether the taxpayer has a legally enforceable right or ability to make a change in the board of directors of the corporation, or the board’s power, or to exercise influence over the shareholder(s) who have that right or ability. The previous factors are not mandatory in determining factual control

In general, a corporation is associated with another corporation if it meets one of the following six conditions at any time in the tax year. Remember that controlled means directly or indirectly in any way.

Condition 1

The corporations are associated if one corporation controls the other.

Example

Corp X owns 100% of the voting shares of Corp Y, which in turn owns 51% of the voting shares of Corp Z.

Corp X is associated with Corp Y, because it exerts direct control over it.

Corp X is associated with Corp Z because it exerts indirect control over it.

Condition 2

The corporations are associated if both corporations are controlled by the same person or group of persons.

Corporations may be associated because the same group of persons controls both corporations, but the members of this group do not act together and have no other connection to each other.

CCPCs that are associated only because of this definition of a group will NOT be considered associated when:

  • calculating the refundable investment tax credit on eligible SR&ED expenditures
  • calculating the expenditure limit
  • allocating the expenditure limit

For this exception to apply, one of the corporations must have at least one shareholder who is not common to both corporations.

The corporations will continue to be associated for all other purposes of the Income Tax Act.

Example

Bob owns 40% of the voting shares of Corp ABC and 30% of the voting shares of Corp XYZ. Ike owns 20% of the voting shares of Corp ABC and 40% of the voting shares of Corp XYZ.

As a group, Bob and Ike control both companies. Corps ABC and XYZ are associated.

Condition 3

The corporations are associated if all of the following apply:

  • each corporation is controlled by one person
  • that person is related to the person controlling the other corporation
  • one of those persons owns at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of each corporation
Example

Billy owns 100% of the issued share capital of Corp AB. He also owns 25% of the class A shares (other than shares of a specified class) of Corp CD, whose controlling shareholder is Billy’s brother.

Corps AB and CD are associated.

Condition 4

The corporations are associated if all of the following apply:

  • one corporation is controlled by one person
  • that person is related to each member of a group of persons who controls the other corporation
  • that person owns at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of the other corporation
Example

Buddy controls Corp AY. His two daughters control Corp AZ. Buddy also owns 50% of the class A preferred shares of Corp AZ.

Corps AY and AZ are associated.

Condition 5

The corporations are associated if all of the following apply:

  • each corporation is controlled by a related group
  • each of the members of one of the related groups is related to all members of the other related group
  • one or more persons who are members of both related groups, either alone or together, own at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of each corporation
Example

Anne and her two daughters control Corp One. Anne and her two sons control Corp Two. Anne owns 33% of the common shares in each corporation.

Corps One and Two are associated.

Condition 6

Two corporations that are not associated with each other will be considered associated under subsection 256(2) if they are associated with the same corporation (the third corporation). Special rules apply for determining the small business deduction. See Schedule 28, Election not to be Associated Through a Third Corporation, on page 31 for details.

Example

Corp AB owns 100% of the issued share capital of Corp CD. It also owns 25% of the class A shares (other than shares of a specified class) of Corp XY, whose controlling shareholder is Billy. Billy’s brother controls Corp AB.

Corps AB, CD, and XY are associated.

In Dominque’s list the condition is described as:
“one or more persons who are members of both related groups, either alone or together, own at least 25% of the issued shares of any class, other than shares of a specified class, of the capital stock of each corporation”

Since person [a] and [b] together own at least 25% of the shares, it seems to me the corporations are associated.

Observation

Google is really behind in finding the updated Canada and CRA references. It often takes me several attempts at finding the correct search terms. The first relevant hit was from Dr. Tax. Based on the contents of that hit I tried again. In this case the winning search term was T2 Schedule 9. The second result was the actual wording of the conditions on the form. Unfortunately the CRA form itself omits this information.

Would whom ever attends CRA consultations please ask CRA to include the explanations on the pdf and html versions of the forms? Those of us who started with paper forms know that they exist. Now we would all like to be access this information quickly and easily when firnding the forms online.

TaxCycle
It would be useful to have this info included on the T2 Schedule 9 in TaxCycle.

Thank you for all your response. I am too involved in this, (in fact, I am the person [f] in Company B. I guess in my deepest heart I wish they are not associated haha).

Actually, now that I took a break and restructure my thought, Company A and B are associated base on 256(1)(e) for the following reason:

Person [a] , [b] is a controlled group in Company A
Person [a]. [b] and [c], collectively owning more than 50% of Company B is a controlled group in Company B.

Each of the members of one of the related groups is related to all members of the other related group.
Both [a] and [b] collectively own more than 25% of Company B.

Thanks everyone!

You may want to look at https://archive.org/web/ and check out cra.gc.ca for an earlier date to find what was once available.

@helga_spence

I had forgotten to do that. Thank you very much for the reminder and for another option.

Wayback Machine had been recommended to me by Maryse in 2017.
https://archive.org/web/