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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).

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
(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", if:
(1) they are controlled by the same person or group of persons,
(ii) 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,
(iii) 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,
(iv) 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,
(v) 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
(vi) 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: February 18, 2021

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