Mr. X and Mr. B are both Canadian residents and business partners. Mr. X and Mr. B incorporated a corporation (“Opco”) in order to carry on their business. All of the issued shares of Opco are held equally by Mr. X and Mr. B.

In this situation, Opco is a CCPC.

Mr. X and his two daughters, Ms. B and Ms. C, incorporated a corporation (“Aco”) in which they own shares in the following proportions: Mr. X owns 20%, Ms. B owns 20%, and Ms. C owns 60%. In this example, Mr. X and Ms. B are Canadian residents, but Ms. C is not a resident of Canada.

In this situation, Aco is not a CCPC since it is controlled by Ms. C, who is not a resident of Canada.

All of the shares of Cco are held by Bco. The shares of Bco are held by Aco (60%) and Mr. X (40%).

In this situation, Aco, Bco and Cco are all associated corporations. Specifically:

• Cco is associated with both Bco and Aco since it is controlled, directly or indirectly, by both Bco and Aco.
• Bco is associated with both Aco and Cco because it controls Cco and is controlled by Aco.
• Aco is associated with both Bco and Cco since it controls, directly or indirectly, both corporations.

Example A

Mr. A is the sole shareholder of two corporations, Aco and Bco.

In this situation, Aco and Bco are associated corporations since they are both controlled by the same person.

Example B

Mr. A, Mr. B and Mr. C are not related persons under the Income Tax Act (ITA). They each own 33.33% of the issued shares of Aco. Additionally, Mr. A owns 40% of the issued shares of Bco, while Mr. B owns 20%. The remaining issued shares of Bco are held by persons not related to Mr. A or Mr. B (“unrelated persons”).

In this situation, Mr. A and Mr. B, together, own more than 50% of the issued shares of Aco and Bco, and, therefore, form a group that controls Aco and Bco. Accordingly, Aco and Bco are associated corporations.

For purposes of determining whether two corporations are associated, a “group of persons” can be formed by any two or more persons and the members of the group do not have to act together or have any connection to each other. Please refer to the T2 Guide (Chapter 2) for additional information on the definition of “groups of persons” and the limited circumstances in relation to which this definition may not apply.

Mr. A and his spouse, Mrs. A, each control a corporation, Aco and Bco, respectively. Mr. A also owns 25% of the issued shares of Bco.

In this situation, Aco and Bco are associated corporations since Mr. A, the person who controls Aco, is related to Mrs. A, the person who controls Bco, and Mr. A owns at least 25% of the issued shares of both Aco and Bco.

In this example, if Mr. A owned less than 25% of the issued shares of Bco, then Aco and Bco would not be associated corporations.

Mr. A is the sole shareholder of Aco and also owns 25% of the issued shares of Bco. The remaining issued shares of Bco are held by Mr. A’s spouse, Mrs. A, and Mr. A’s brother, Mr. B

In this situation, Mr. B and Mrs. A form a group of persons that controls Bco since, together, they own 75% of the issued shares of Bco. Since Aco is controlled by Mr. A and Mr. A is related to each member of the group of persons that controls Bco (Mrs. A and Mr. B), and owns at least 25% of the issued shares of Bco, Aco and Bco are associated corporations.

If Mr. B was not the brother of Mr. A and was not related to Mr. A and Mrs. A, Aco and Bco would still be associated corporations. This is because the group of persons formed of Mr. A and Mrs. A also controls Bco since, together, Mr. A and Mrs. A own more than 50% of the issued shares of Bco. Since Aco is controlled by Mr. A, and Mr. A is related to each member of the group of persons that controls Bco (being Mrs. A and Mr. A), Aco and Bco would be associated corporations.

Mrs. C and her spouse, Mr. C, each own 50% of the issued shares of Aco and, therefore, form a related group of persons that controls Aco. Mr. C also owns 33.33% of the issued shares of Bco. The remaining issued shares of Bco are held by Mr. C’s brother, Mr. D, and Mrs. X, a person who is not related to any of Mrs. C, Mr. C, or Mr. D. Mr. C and Mr. D, together, own 66.66% of the issued shares of Bco and therefore form a related group of persons that controls Bco.

In this situation, each corporation is controlled by a related group of persons and each member of one of the related groups (Mrs. C and Mr. C) is related to all members of the other related group (Mrs. C is related to her spouse, Mr. C, and to her spouse’s brother, Mr. D, and Mr. C is related to himself and to his brother, Mr. D), and one person who is a member of both related groups (Mr. C) owns at least 25% of the issued shares of each corporation. As a result, Aco and Bco are associated corporations.

Mr. A is married to Mrs. A and they have two sons, each of whom is married or in a common-law relationship. In this situation, Mr. A will be related to his spouse, his sons and his sons’ spouses or common-law partners for purposes of the ITA.

Mrs. A is the mother of Ms. B and Mr. C. Mrs. A’s sister, Mrs. D, also has a daughter, Ms. E.

In this situation:

• Mrs. A will be related to her children, Ms. B and Mr. C, and her sister, Mrs. D, but will not be related to her niece, Ms. E.
• Ms. B and Mr. C will be related to each other and to their mother, Mrs. A, but will not be related to their aunt, Mrs. D, or their cousin, Ms. E.
• Mrs. D will be related to her daughter, Ms. E, and her sister, Mrs. A, but will not be related to her niece and nephew, Ms. B and Mr. C.
• Ms. E will be related to her mother, Mrs. D, but will not be related to her aunt, Mrs. A, or her cousins, Ms. B and Mr. C.

Aco and Bco are both CCPCs that each earned active business income this year - $400,000 for Aco and $300,000 for Bco. Because Aco and Bco are associated corporations, they can’t each claim the SBD on all their active business income.

Instead, Aco and Bco will share a combined business limit of $500,000, even though their total active business income for the year is $700,000. Aco and Bco will need to agree on how to divide this $500,000 limit between them. They must also complete schedule T2SCH23 (Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit) to document their allocation of the business limit.

Aco and Bco are both CCPCs conducting SR&ED. This year, Aco spent $3 million and Bco spent $1 million on SR&ED. Because Aco and Bco are associated corporations, they cannot each claim an ITC at the enhanced rate of 35% on all of their SR&ED expenditures.

Instead, Aco and Bco will share a combined expenditure limit of $3 million (being the expenditure limit applicable in that year) for claiming the ITC at the enhanced rate, even though their total qualified SR&ED expenditures for the year is $4 million. Aco and Bco will need to agree on how to divide this $3 million limit between them. They must also complete schedule T2SCH49 (Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Expenditure Limit) to document their allocation of the expenditure limit.