Tax Tip[] Association

Association – Control in Fact

“Control in fact must be determined by considering all relevant factors.”

In the case of Timco Holdings Limited vs. The Queen (2003-1710(IT) G), the Court had to decide whether WCD Developments Limited (“Developments”) was associated with Timco Holdings Limited (“Holdings”). Developments was controlled by Mr. Duntz. Holdings was owned 50% by Developments and 50% by a non-resident not related to Mr. Duntz. Developments and Holdings carried on most of their businesses through a joint venture. Developments owned 38% of the joint venture and Holdings 30%. The non-resident had arranged for Mr. Duntz to act as a director and to serve as the president of Holdings in order to expedite the signing of documents.

The CRA assessed the corporations as associated on the basis that Mr. Duntz had “de facto control” of both corporations.

The Court reviewed a number of cases and determined that, in order for there to be de facto control, a person must have a clear right and ability to effect a significant change in the Board of Directors or the powers of the Board of Directors or to influence directly the shareholders who would otherwise have the ability to elect the Board. After considering all the facts, the Court held that Mr. Duntz could not control the election of the directors of Holdings because:

  1. Developments owned only 50% of the voting shares of Holdings.
  2. There were no agreements that gave Mr. Duntz the power to determine the directors of Holdings.
  3. Mr. Duntz had no direct influence over the non-resident.

It was clear in the joint venture agreement that nothing could be done without unanimous agreement, so Mr. Duntz did not control Holdings.

When an individual is involved with two corporations, a careful review is required to ensure that the individual does not have de facto control of both, if it is important that the corporations not be associated.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Deemed Association

“Shares held by trusts or minors could have adverse results for association purposes..”

There are a number of deeming rules within the Association rules that accounting practitioners should be very careful of. Sometimes, these rules apply in situations where there was no intention for there to be a change in association.

One of the key deeming rules has to do with trusts. If there is a discretionary trust that owns shares in a company, each of the discretionary beneficiaries is deemed to own all of the shares in the company. For example, if there are four beneficiaries in a trust, each one of those beneficiaries is deemed to own all of the shares held by the trust, for association purposes. This means that if a spouse is a beneficiary of a trust and she owns her own separate company, then those companies would be associated because she would be deemed to own 100% of the shares of the first company, as well as the shares she already owns of the second company.

Another deeming rule to be aware of deals with minor children. There is a rule that states that any shares held by a minor child are deemed to be owned by each of the parents of that child. This means that if a minor child owns shares of a company, the mother and the father are each deemed to own all of the shares owned by the child. If you combine this rule with the rule discussed above, there could be issues in a situation where a parent is not a beneficiary of a trust, but the children are. Take the situation where Mom owns 100% of one company and a trust owns 100% of the second company. Both companies would be associated because Mom would be deemed to own all of the shares owned by the child and the child would be deemed to own all of the shares held by the trust. This is especially dangerous in estate freeze situations.

Whenever a trust is used or a minor is used to own shares, careful consideration should be given as to whether or not this affects the association of family companies.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Disassociating Companies

“Using a specified class of shares can disassociate companies..”

There are many situations where two companies are associated when that was never the intention of the shareholders. Sometimes association occurs unintentionally where there is an estate freeze. Usually, the parent who owns the common shares exchanges his or her shares for frozen preferred shares. The parent’s children or a trust for the benefit of the children usually purchases the common shares of the company. Depending on the attributes of the preferred shares, the operating company may still be associated with other companies owned by the parent. In those situations where the parent truly gives up control of the company to his/her kids, this is an unintentional result.

It is possible, however, to ensure that the operating company being frozen is not associated with the other companies held by the parent. If the frozen shares that the parent takes back are a “specified class,” then the parent’s investment in the operating company is not considered in determining if that company is associated with the other companies. Pursuant to subsection 256(1.1), a specified class must have the following attributes:

  • Shares are not convertible or exchangeable;
  • Shares are non-voting;
  • There is an annual dividend rate on the shares that does not exceed the prescribed rate of interest at the time the shares were issued;
  • The redemption value of the shares must not exceed the fair market value of consideration received when the shares were issued.

The only one of the attributes mentioned above that could be an issue with the parent doing the freeze would be the attribute of non-voting. The parent must be comfortable having no votes in the future of the company in order to disassociate the companies. Whether a client is interested in disassociating the companies by losing control of that company will depend on each specific situation. If, however, it is a family trust that will own the common shares, it is possible that the parent could still have control of the company by being a trustee who votes the common shares held by the trust.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.