Are Company A owned by one spouse, and Company C owned by the other spouse associated?

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This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter 07-0024, May 2007

We refer to your letter dated XXXXXX, regarding whether Company A and Company C are associated for Employer Health Tax (EHT) purposes. In particular, whether both companies are eligible for the $400,000 annual exemption.

According to information provided with your letter, we understand that:

  • Company A is 100% owned by Individual A (president).
  • Company C is 100% owned by Individual C (president).
  • Individual A and C are spouses.
  • Company A rents a building and property from Company C at fair market rates.
  • Both companies operate strictly at arms length.

Eligible employers who are associated with each other at any time in a year must share the tax exemption amount. Two or more employers are considered associated for EHT purposes if they are associated under section 256 of the Income Tax Act (Canada) (ITA). The essential test in determining whether a corporation is associated with another relies on the control of the corporation that is exercised 'directly or indirectly in any manner whatsoever'.

This expression encompasses:

  • de jure control (i.e., control in law), the right to a majority of voting shares in a company
  • de facto control (i.e., control in fact), as determined under subsection 256(5.1).

De facto control may exist even without the ownership of any shares and can take many forms, such as the ability of a person to directly or indirectly terminate the corporation or its business, appropriate profits or property, or change the board of directors. Potential influence, even if it is not actually exercised, is considered to be sufficient evidence for the presence of de facto control.

Federal IT Bulletin IT-64R4 states that control may exist by de facto control where the following circumstances exist:

  • Ownership of a large debt of a corporation (employer) which may become payable on demand.
  • Shareholder agreements including the holding of a casting vote.
  • Commercial or contractual relationships of the corporation (employer), for example, economic dependence on a single supplier or customer.
  • Possession of a unique expertise that is required to operate the business.
  • The influence that a family member, who is a shareholder, creditor, supplier, etc. of a corporation (employer), may have over another family member who is a shareholder of the corporation. Close family ties (between spouses) especially lend themselves to significant influence. Generally, these persons must demonstrate their economic independence and autonomy before escaping presumptions of fact which apply to related persons.

Based on the available information, Company A is not associated with Company C by virtue of de jure control for EHT purposes. Neither spouse owns shares in the other's corporation. Therefore, if they are not associated by virtue of de facto control, each company is eligible for the $400,000 annual exemption. However, we are unable to provide you with a definitive response on whether the corporations are associated by virtue of de facto control. Such a determination would involve a complete understanding and analysis of all the facts of a particular situation and is usually determined through an audit.

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