Schedule 9, Related and Associated Corporations

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.

When determining whether a taxpayer has any direct or indirect influence that, if exercised, would result in factual control of the corporation, one must:

• 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 qualified 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

Under subsection 256(2), two corporations that are not associated with each other will be considered associated 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 34 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.

References
Section 251
Subsections 256(1), (1.1), (1.2), (2), and (5.1)
IT-64, Corporations: Association and Control

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