A real estate rental company (ABco), which otherwise would be associated with its two 50% shareholders (Aco and Bco, which are wholly-owned by two brothers) pursuant to s. 256(2), are not associated as a result of ABco electing under s. 256(2) not to be associated with Aco and Bco. Similarly, CDco), which carries on an active business and has incurred loans to Aco and Bco (each 33% shareholders) elects under s. 256(2) not to be associated with Aco and Bco.
CRA stated:
[T]he election under subsection 256(2) applies only for the purposes of section 125. Thus …Bco and ABco would continue to be associated for the purposes of all other provisions of the Act, including subsection 129(6). Thus, subparagraph 129(6)(b)(i) would apply to deem the amounts paid to ABco as rent by Aco and Bco to be income from an active business carried on by it in Canada. The same reasoning would apply … for Aco, Bco and CDco.