Ads keep this website free for you.
TaxTips.ca does not research or endorse any product or service appearing in ads on this site.  Before making a major financial decision you  should consult a qualified professional.

Arm's Length / Non-Arm's Length TaxTips.ca
Canadian Tax and
Financial Information
TaxTips.ca Home

What's New

Links & Resources

Site Map

Need an accounting, tax or financial advisor? Look in our Directory.  Use above search box to easily find your topic!   Stay Connected with TaxTips.ca!

Home  ->  Glossary  -> Arm's Length / Non-Arm's Length

Arm's Length / Non-Arm's Length

Income Tax Act s. 251(1), s. 251(2)

Two people, or entities, are said to be dealing at arm's length with each other if they are independent, and one does not have undue influence over the other.  However, the Income Tax Act deems some people NOT to be at arm's length with each other (non-arm's length).

Related persons are deemed not to deal with each other at arm's length.  Related persons are "individuals connected by blood relationship, marriage or common-law partnership or adoption".  Blood relationships do not normally include aunts, uncles, nieces, nephews, or cousins for purposes of the Income Tax Act.

"Related persons" also include a corporation and

  1. a person who controls the corporation, if it is controlled by one person
  2. a person who is a member of a related group that controls the corporation, or
  3. any person related to a person described in i or ii.

Two corporations can also be "related persons", if:

  1. they are controlled by the same person or group of persons,
  2. each of the corporations is controlled by one person and the person who controls one of the corporations is related to the person who controls the other corporation,
  3. one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation,
  4. one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation,
  5. any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation, or
  6. each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.

Generally, a corporation is controlled by a person or a related group if the person or related group owns enough shares to have the majority of the votes in the election of the board of directors.  However, there are many situations where there is "deemed" control.

Tax Tip:  If you have multiple corporations, get professional advice on related and associated corporations!

Canada Revenue Agency (CRA) Resources

Income Tax Folio S1-F5-C1 Related persons and dealing at arm's length

T4012 T2 Corporation Income Tax Guide - Information schedules and forms - Schedule 9, Related and Associated Corporations

Interpretation Bulletion IT-64R4, Corporations:  Association and Control (Archived)

Revised: September 20, 2024

 

Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved.  See Reproduction of information from TaxTips.ca

Facebook  | Twitter  |  See What’s New, stay connected with TaxTips.ca by RSS or Email
The information on this site is not intended to be a substitute for professional advice.  Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage. 
Please see our legal disclaimer regarding the use of information on our site, and our Privacy Policy regarding information that may be collected from visitors to our site.