Tax Considerations for Corporation Associations

Incorporating a small business, commonly referred to as a Canadian-controlled private corporation (CCPC), offers the benefit of a lower tax rate. However, if you have control over multiple corporations, it’s essential to note that the reduced tax rates are applicable to the combined income of up to $500,000 from all these corporations, as per the guidelines set by the CRA. 

Why is this Important? 

If you’re a shareholder in multiple corporations, especially with family members, understanding the tax implications is crucial. Owning a corporation means you should be familiar with the corporation association rules. Here’s why: 

A CCPC, which is a corporation under the control of a Canadian resident, is eligible for a small business deduction. In practical terms, a CCPC in Ontario pays a tax rate of 12.2% on its active business income up to $500,000. In contrast, other corporations are taxed at 26.5% (this rate may vary depending on the province). 

However, the catch is that this $500,000 small business deduction limit is a collective amount for all associated corporations. In simpler terms, if you control multiple corporations, the lower tax rate is applied to the combined income of up to $500,000 for all these corporations, rather than each corporation separately. There are also other tax implications for corporations that are related or associated. 

Understanding Control and Association 

Control, in this context, means owning over 50% of a corporation’s voting shares. Based on income tax law: 

• Individuals can be related to other individuals, such as spouses, parents, siblings, and parents-in-law. However, relationships with uncles, aunts, nieces, nephews, and cousins are excluded. 
• Individuals and Corporations can be related. For instance, if an individual has control over a corporation, they are considered related. 
• Corporations can be related to other corporations if they are controlled by the same individual. 

The term “Association” is technically defined under subsections 256(1) of the Income Act, which determines the association between corporations. There are five tests under section 256(1) to determine association, and they can be quite intricate.