In the following org chart, do corporations have to share the $500,000 business limit?[1]

The answer is no!

In fact, Immo will not have a business limit, and Opco X and Opco Y will each have a business limit if Immo makes an election under subparagraph 256(2)(b)(ii) of the Income Tax Act (ITA)[2] on Schedule 28 of its T2 income tax return on an annual basis.

1. Some key facts:

Mr. X and Mrs. Y are married. They could be common-law partners, and it wouldn't change the outcome. Whether they are married or in a common-law relationship, they are related persons under paragraph 251(6)(b) ITA.

Mr. X, Mrs. Y and all corporations are related under 251(2)(b) ITA.

2. Analysis of associations:

Opco X and Immo

Mr. X controls Opco X, but not Immo, because he owns only 50% of the shares and FMV, with no control in fact.

The company Immo is controlled by Mr. X and Opco Y. By applying the look-through rule in accordance with 256(1.2)(d) ITA, Mrs. Y indirectly owns 50% of Immo through Opco Y.  Since Mr. X and Mrs. Y are related, they form a related group that controls Immo.

Mr. X is deemed to be related to himself in accordance with 256(1.5) ITA.

In accordance with 256(1)(d) ITA, Opco X and Immo are associated. Indeed, Mr. X is related to each of the persons in the group that controls Immo, and he holds more than 25% of Immo's shares.

Consequently, the companies Opco Y and Immo should share their business limit.

Opco Y and Immo

Mrs. Y controls Opco Y, but she does not control Immo directly. Through Opco Y, she owns only 50% of the shares and the FMV and has no factual control.

Mr. X and Opco Y directly control Immo. By applying the look-through rule under 256(1.2)(d), Mrs. Y owns 50% of Immo via Opco Y. Indirectly, the company Immo is controlled by Mr. X and Mrs. Y. They are related. They form a related group that controls Immo.

Mrs. Y is deemed related to herself in accordance with 256(1.5) ITA.

In accordance with 256(1)(d) ITA, Opco Y and Immo are associated. Indeed, Mrs. Y is related to each of the persons in the group that controls Immo, and she indirectly holds more than 25% of Immo's shares.

Consequently, the companies Opco Y and Immo should share their business limit.

Opco X and Opco Y

In accordance with 256(2), Opco X and Opco Y are associated corporations because they are both associated with the same corporation, the Immo corporation.

On the other hand, under paragraph 256(2)(b), for the purposes of section 125, or for the purposes of sharing the business limit, if the third corporation elects on Schedule 28 of its T2 not to be associated with Opco X and Opco Y, then Opco X and Opco Y are deemed not to be associated.

However, the group taxable capital will continue to affect the business limits.

Opco X and Opco Y can each benefit from their full business limit, subject to the taxable capital of the group.

Immo will not have a business ceiling.

Immo has to make this election every year if it does not want to be associated.

[1] Note: This analysis is a simplified version of a hypothetical situation and omits some references and details for brevity. Each situation is unique, so it is recommended that you consult a tax professional for advice tailored to your specific needs.

[2] Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.).