Associated Corporations: How Owning Multiple Companies Affects Your Tax Rates – A Complete Guide by a Montreal CPA Firm Near You

Understanding associated corporations in Canada is essential for any business owner
who operates, controls, or holds shares in more than one corporation. Many
entrepreneurs set up multiple companies to separate business divisions, protect assets,
minimize risk, or pursue new opportunities. However, CRA applies strict rules that
determine whether these companies are associated, which directly affects access to
the $500,000 Small Business Deduction (SBD), corporate tax rates, capital limits, and
passive income calculations. Misunderstanding these rules can result in higher taxes,
unexpected reassessments, and the denial or clawback of preferential small business
rates. This guide explains how associated corporations work in Canada, how CRA
determines control, how the small business limit must be shared, and how to structure
your corporate group strategically.
Legal and Regulatory Framework
Associated corporation rules are governed by section 256 of the Income Tax Act.
Under these rules, two or more corporations are considered associated if:

1. One corporation controls the other, directly or indirectly.

2. Both are controlled by the same person or group of persons.

3. Each is controlled by a related person, and one of those persons owns at
   least 25% of the shares of any class of the other corporation.

4. The corporations are part of a related group, as defined under the Act.
   Key implications include:
   • Sharing the Small Business Deduction – Associated corporations must share the
   $500,000 SBD limit, affecting access to the lower small business tax rate.
   • Taxable Capital Rules – Associated corporations must combine taxable capital when
   determining eligibility for the SBD under section 125(5.1).
   • Passive Investment Income Rules – Passive income earned in one corporation
   affects the SBD entitlement of all associated corporations.
   • Filing Schedule 23 – Corporations must allocate the business limit using Schedule 23
   of the T2 return.

• Control Tests – CRA considers both de jure (legal) control and de facto (factual)
control, meaning even informal influence may trigger association.
These rules form the legal foundation for associated corporations in Canada.
Key Court Decisions
Several important cases illustrate how CRA and courts interpret corporate association.
In Duha Printers v. Canada, the Supreme Court clarified the test for de jure control,
emphasizing the importance of voting shares and shareholder agreements.
In Silicon Graphics Ltd. v. Canada, the Federal Court of Appeal expanded the concept
of de facto control, ruling that influence over strategic decisions constitutes control
even without majority shares.
In McGillivray Restaurant Ltd. v. Canada, CRA successfully argued that two
corporations were associated because a related group collectively controlled both
companies.
In Lyrtech RD Inc. v. Canada, passive investment income earned by a holding company
affected the SBD entitlement of its associated operating company.
These decisions show that corporate association is determined by substance—not just
paperwork.
Why CRA Targets This Issue
CRA intensely scrutinizes associated corporations because sharing the SBD can
significantly reduce total tax paid by a corporate group. CRA focuses on:
• corporations with shared ownership or family ownership
• corporate groups with multiple CCPCs operating similar activities
• holding companies receiving investment income
• reorganizations intended to multiply access to the SBD
• companies attempting to split income across entities with no commercial purpose
• situations where influence exists without formal legal control
CRA also reviews shareholder agreements, financing arrangements, related-party
transactions, and family involvement to determine whether corporations are associated.
Because incorrect classification may lead to lower-than-allowed tax rates, CRA enforces
these rules strictly.
Mackisen Strategy

At Mackisen CPA Montreal, we help business owners properly structure their corporate
groups to comply with association rules and minimize total tax exposure. Our structured
strategy includes:
• analyzing share ownership, voting control, and shareholder relationships
• identifying whether corporations meet de jure or de facto control tests
• allocating the Small Business Deduction efficiently using Schedule 23
• planning ownership structures to minimize unintended association
• evaluating whether holding companies should be associated based on passive income
• designing corporate reorganizations to ensure legal compliance
• defending clients during CRA reviews involving association, control, or SBD
allocations
• creating long-term strategies that balance tax savings, liability protection, and
operational efficiency
We ensure you understand exactly how your corporations interact for tax purposes and
how to structure them properly.
Real Client Experience
A family-owned business created a second corporation to expand operations. CRA
classified the companies as associated because the same family members controlled
both. We allocated the SBD properly and restructured ownership to avoid future
complications.
Another client created a holding company to manage investments. Passive income in
the Holdco clawed back the SBD in the OpCo. We implemented purification strategies
and reorganized the corporate group to restore small business access.
A third client owned multiple small corporations and tried to claim separate SBD limits.
CRA reassessed all filings. We corrected the structures, negotiated reduced penalties,
and created a compliant multi-corporation tax plan.
These real-world examples illustrate how vital proper planning is when dealing with
associated corporations in Canada.
Common Questions
Business owners often ask whether simply owning two corporations creates
association. Control and ownership matter—CRA looks at voting shares and influence.
Others ask whether family-owned companies are automatically associated. Not always,
but related ownership often leads to association.
Some ask whether separate industries avoid association. No—industry type does not
matter.

Another question: Can association be avoided through minority share ownership? Only
if true independent control exists—not nominal or artificial ownership.
These questions show why understanding associated corporations in Canada is
essential.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
entrepreneurs structure and manage multiple corporations safely and tax-efficiently.
Whether you operate several businesses, hold investments through a Holdco, or are
planning a reorganization, our expert team ensures precision, transparency, and
protection from audit risk.