Your Business, Your Family Business and Your Association Limit

For many of us, there is no one we trust more than our families.  We have known them all of our lives.  When it comes to money and investments, it is fairly common to see families stick together.  Unfortunately, one circumstance of family structures is that businesses become associated with each other for tax purposes.  One implication of this is that the businesses must then share their small business deduction limit of $500,000 with each other whereas they would have otherwise had their own limit.  This small business deduction limit provides a tax deferral of approximately $75,000 every year.

The association rules are complex and so association is often not so easy to see.  One must study the appropriate sections of the Income Tax Act, obtain all information about the holdings of each shareholder of each business, and then carefully evaluate these facts.

A common misconception is that two companies are only associated if one owns greater than 50% of the shares of another.  While this is true, it is far from being the only situation.  Your wholly owned business can be associated with the family business if your ownership in the family business is at least 25%.  This is one example of a potentially hidden association.  There are other situations which are less obvious and so a careful study is a must.

For companies which are associated, there are additional required schedules to complete and planning decisions need to be made every year.  The small business limit must be allocated and reported consistently across all returns, each year.  If the family business uses the limit each year but it then has a poor year, there is then a planning opportunity to be seized.  That is, there would be excess limit which may be allocated to another business, such as yours.

There are other consequences of association as well.  Where companies are associated, re-organizational steps may be applied to disassociate them, if this is advantageous.  There are also tax elections available whereby companies may elect to disassociate from each other for the purposes of this small business deduction limit; however, this is only applicable in specific circumstances and it is not always advantageous to do.  A careful study is necessary.

If you have questions on this or any similar matter, please call or email us to discuss.

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