The concept of control is used throughout the Income Tax Act, and is an essential test used to determine if one corporation is “associated” with another.

Generally, corporations are associated if one controls another “directly or indirectly in any manner whatever” or if there is common control of the corporations.  This designation is important, as certain tax rules and restrictions apply to corporations that are associated.  The most commonly cited one is the use of the Small Business Deduction (SBD).  Associated corporations share the SBD, which provides access to a low tax rate on the first $500,000 of operating income.  Obviously, this could be a concern to small business owners.

There are two kinds of control: de facto control and de jure control.

De Facto control means “direct or indirect influence that, if exercised, would result in control of the corporation.” Case law has confirmed that de facto control may exist even where there is no share ownership, but there is influence.  If that influence is exercised, it could be sufficient to result in de facto control.

De Jure control means control in law.  Holding sufficient shares to elect the majority of the directors in the corporation indicates de jure control.  This can occur through a single person, or could be a group of individuals, corporations, or trusts.  If the same person or group of people controls two companies, the two companies will be considered associated.  The group of people do not have to be related – the two groups must simply be made up of the same members.

The Income Tax Act has some more fun rules around “deemed ownership” of shares, which are important to consider when determining de jure rule:

  • Shares held by a discretionary trust are deemed to be held by each beneficiary of that trust (not the Trustee).
  • Shares held by a non-discretionary trust are deemed to be held by the beneficiary with the entitlement to the shares.
  • Shares held by minors are deemed to be held by the parents – often a surprise to families, and can create problems where there are second and common-law marriages.

Control is an important concept in tax planning and can significantly affect how those corporations manage their affairs. Minimize your “surprises” by planning ahead.


Julia Chung
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