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Arm's Length

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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).  This is the case with "related persons", who 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
     i.   a person who controls the corporation, if it is controlled by one person
     ii.  a person who is a member of a related group that controls the corporation, or
     iii. any person related to a person described in (i) or (ii).

Two corporations can also be "related persons".

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.

Canada Revenue Agency (CRA) Resources:

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

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

Revised: November 01, 2017



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