Three children each of whom wholly-owns a Childco are also, along with their parent, the discretionary beneficiaries of a family trust owning all the non-voting common shares of Parentco, whose voting shares are held by the parent. If the Childcos were otherwise deemed by s. 256(2) to be associated with each other, but Parentco made three elections under s. 256(2)(b)(ii) not to be associated with each Childco, would the Childcos be associated corporations for s. 125 purposes – and, if so, would the taxable capital of Parentco and the other Childcos be taken into account in calculating the reduction in the business limit of a particular Childco under s. 125(5.1)?
CRA indicated that each Childco is associated with Parentco given that s. 256(1.2)(f)(ii) deems a discretionary beneficiary to own the trust shares for association purposes. Accordingly (and absent an s. 256(2)(b)(ii) election), under the “transitivity” rule in ss. 256(2)(a), the Childcos are also associated with each other.
However, if Parentco makes the elections, it will be deemed to not be associated with the Childcos for purposes of applying the transitivity rule for s. 125 purposes. Accordingly, for small-business-deduction purposes, the Childcos will no longer be associated with each other - but will still be associated with Parentco for such (and other) purposes. CRA then stated:
To the extent that [Parentco] makes the elections referred to above, in computing the business limit reduction under subsection 125(5.1) for [the Childco], the taxable capital employed in Canada of [the Childco] and of [Parentco] should be taken into account.