Each of Aco, Bco and Cco is wholly-owned by siblings (A, B and C), and their parent (D) holds all the voting non-participating shares of Dco. A, B, C and D are discretionary beneficiaries of a trust of which D and his accountant are the trustees holding all the non-voting common shares of Dco. Would Aco, Bco and Cco be deemed by s. 256(2) to be corporations associated with each other; and if Dco makes three elections under s. 256(2) not to be associated with Aco, Bco and Cco, would Aco, Bco and Cco then be associated corporations for s. 125 purposes?
CRA first noted that each of Aco, Bco and Cco is associated with Dco. For instance:
A is related to D under paragraph 251(2)(a) and, because of the presumption in subparagraph 256(1.2)(f)(ii), A is deemed to own the shares in the capital stock of Dco owned by the Trust. Consequently, A, who controls Aco, is related to D, who controls Dco, and A owns at least 25% of the issued shares of any class, other than a specified class, in the capital stock of Aco and Dco.
S. 256(2)(a) then applies to deem Aco, Bco and Cco to be associated with each other as each is associated with Dco. However, as a result of the elections:
Dco's business limit, for its taxation year that would include that time, would be deemed to be nil. Consequently, Aco, Bco and Cco would no longer be associated corporations for purposes of section 125. However, Aco, Bco and Cco would remain associated with Dco.
Furthermore, as a consequence of the elections, in computing the business limit reduction under s. 125(5.1) for Aco (as an example) the taxable capital employed in Canada of Aco and of Dco should be taken into account.