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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
a person
who controls the corporation, if it is controlled
by one person
a person who is
a member of a related group that controls the
corporation, or
any person related
to a person described in i or ii.
Two corporations can also be "related
persons", if:
they are controlled by the same person or group of persons,
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,
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,
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,
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
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!
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