Individual A owns 51% of Company A and 100% of Company C. Are Company A and Company C associated?

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Interpretation Letter 08-0039, April 2008

We refer to your letter regarding Company A and Company C in relation to the association rules under the Employer Health Tax (EHT) Act. We have received letters of authorization from both taxpayers.

Subsection 1(5.1) of the EHT Act states that for the purposes of determining if employers are associated, section 256 of the Income Tax Act (Canada) applies for EHT.

Subsection 256(1) provides basic rules for making a determination as to whether corporations are considered associated. Corporations are considered, among other reasons, to be associated if:

  • two corporations are controlled directly or indirectly, by the same person or group of persons.

The essential test in determining association under section 256 is whether or not control is present. Control can be either de facto or de jure. De facto control essentially refers to control in fact or by conduct. De jure is control by legal right, which generally rests with a majority of the votes in the election of the Board of Directors.

From the information you provided, I understand that:

  • Individual A owns 100% of the shares of Company C
  • Individual A owns 51% of the shares of Company A, with Individual B and her husband owning 49% of the shares
  • Individual A insisted on owning 51% of the shares in consideration for allowing Individual B to use the trade name, and to control the future use of it
  • Individual A is not involved with running Company A in any way
  • Individual B makes all decisions regarding Company A
  • There is no economic dependence between Company A and Company C.

Based on the facts of this situation, although Individual A is not involved in the business operation of Company A, he is nevertheless considered to have control of the business by virtue of owning 51% of the shares. The absence of de facto control cannot negate this fact.

It is our opinion that Company A is associated with Company C and any other businesses Individual A controls.

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