What does it mean for two or more businesses to be “related”? How can this affect their tax status, legal obligations, and strategic decisions? In this article, we will explore the concept of related businesses and the essential requirement that defines them.
What Are Related Businesses?
According to the Canada Revenue Agency (CRA), related businesses are businesses that are connected through ownership, either with one owning the other as a minority shareholder or with multiple businesses being owned by a third party. For example, if Company A owns 40% of Company B, then Company A and Company B are related businesses. Similarly, if Company C owns 100% of Company D and Company E, then Company C, D, and E are all related businesses.
The CRA distinguishes related businesses from subsidiaries, which are businesses where 50% or more of the shares are owned by another business. For example, if Company F owns 60% of Company G, then Company G is a subsidiary of Company F. Subsidiaries are subject to different tax rules and regulations than related businesses.
Why Does It Matter?
The essential requirement for different businesses to be “related” is that they have a common owner or a significant influence over each other. This can have various implications for their taxation, accounting, reporting, and governance.
For taxation purposes, related businesses may be able to claim certain deductions, credits, or exemptions that are not available to unrelated businesses. For example, related businesses may be able to transfer losses or income among themselves to reduce their overall tax liability. However, they may also be subject to certain anti-avoidance rules that prevent them from abusing these benefits. For instance, the CRA may deny the deduction of interest paid by one related business to another if the main purpose of the loan was to reduce taxes.
For accounting purposes, related businesses may need to prepare consolidated financial statements that show the combined financial position and performance of all the related entities. This can provide a more accurate and complete picture of the economic activities and results of the group as a whole. However, it can also increase the complexity and cost of preparing and auditing the financial statements. Moreover, it can create potential conflicts of interest or ethical issues among the managers and directors of the related businesses.
For reporting purposes, related businesses may need to disclose their relationships and transactions with each other in their financial statements and other public documents. This can enhance the transparency and accountability of the related businesses and provide useful information to the stakeholders, such as investors, creditors, regulators, and customers. However, it can also expose the related businesses to more scrutiny and criticism from the public or the authorities if they engage in any questionable or controversial practices.
For governance purposes, related businesses may need to establish clear policies and procedures to manage their relationships and interactions with each other. This can help to avoid or resolve any conflicts of interest or disputes that may arise among the related parties. It can also help to ensure that the related businesses act in the best interests of their shareholders and stakeholders and comply with the applicable laws and regulations.
Conclusion
Related businesses are businesses that are connected through ownership or influence. The essential requirement for different businesses to be “related” is that they have a common owner or a significant influence over each other. This can have various implications for their taxation, accounting, reporting, and governance. Related businesses may enjoy some benefits from being related, such as tax savings or operational synergies. However, they may also face some challenges or risks from being related, such as anti-avoidance rules or ethical dilemmas. Therefore, related businesses need to be aware of their status and obligations and manage their relationships and transactions with each other carefully and responsibly.
