By Nizam Shajani, CPA, CA, MBA
Relationships are important to consider when you plan for taxes and your accountant is a great source for relationship advice. Relationships will determine how transactions are interpreted by the tax authorities and determine how tax accounts must be shares and even when dividends can be issued tax free.
As such, when you discuss relationships with your accountant, don’t expect an encore presentation on Dr. Phil. Perhaps a guest appearance on BNN’s market sense would be more suitable. Relationship advice from your accountant would likely conjure intimate experiences with the tax act and recommendations on arm’s length transactions, related, associated, affiliated and connected interactions that have varying impacts on your taxes and filing positions.
The tax act considers if individuals are dealing at arms’ length and in some cases assumes that they are not – such as in the case of related persons. However, courts have also ruled that unrelated persons can also not be dealing at arm’s length with each other, such as where there is a common mind, acting without separate interests or de facto control.
Related persons consider relationships between individuals, individuals and corporations, and between corporations. In this regard, related is noted as a blood relationship, marriage, common law partnership or adoption – and that relation is extended to corporations within those individuals’ de facto control (based on majority share ownership or votes). It should be noted that blood relations are not extended to distant relatives such as aunts, uncles, cousins etc. however related persons do include brothers / sisters, husband / wife, husband / father in law, parent / child, child / grandparent, separated spouses etc.
Associated corporations have a narrower relation than related corporations – considering de facto control with its own specific definition (for associated corporations) and the sharing of tax benefits such as the small business deduction and SR&D credits. The rules around associated corporations limits the ability to open multiple corporations to gain multiple access to tax benefits.
To be associated, one corporation is controlled by another, both corporations are controlled by the same individual or group, both corporations are controlled by different persons that are related and one of the persons owns 25% or more of the capital stock (unless a specified class) of the other, or by virtue of an individual owning more than 50% of the fair market value of the outstanding shares of the company regardless of voting rights.
Affiliated corporation are considered a united economic unit and transfers between them do not represent a substantive change in economic interests. Property transferred between affiliated persons have stop loss rules.
Connected corporations have a narrower definition than those associated. To be connected, one corporation would control the other or one corporation would own more than 10% of the votes and value of the other corporation.
As such, for tax purposes relationships do not consider love and affection (although we would agree those are the best investments) – but rather the narrowing definitions of related, associated, affiliated and connected deal with the aspect of one controlling the other as well as ensuing economic units.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2020 Shajani LLP