The CRA CERS website was updated to provide guidance and examples to assist in determining whether two parties are acting at arm’s length or not. Applicants cannot claim expenses that were paid or payable to non-arm’s-length entities. Further, if applicants earned any revenue from sub-leasing space on the property to arm’s-length parties, that revenue must be subtracted from eligible expenses. The updates include:
Related persons are deemed not to deal with each other at arm’s length. For non-related persons, it is a question of fact whether they are dealing with each other at arm’s length.
Learn more about what non-arm’s-length means:
Other unrelated persons (Question of fact)
Examples of non-arm’s-length and arm’s-length
Related corporations – retail store
Hold Co and Retail Co are related corporations and therefore do not deal at arm’s length with each other. Hold Co owns a building which it leases to Retail Co. Retail Co pays rent to Hold Co for use of the building to operate its retail store. Retail Co uses the building for its business operations and does not use the building primarily to earn rental income. The rent paid from Retail Co to Hold Co would not be an eligible expense for purposes of the CERS because it is paid to a non-arm’s-length party.
However, Hold Co may be able to claim eligible expenses paid for the building it rents to Retail Co, such as property and similar taxes, property insurance and interest on a commercial mortgage for purposes of the CERS.
One person owns 100% of a corporation’s shares
Mr. A owns 100% of the shares of Op Co. Op Co rents a building that is owned by Mr. A (or vice versa). Mr. A and Op Co are related persons since Mr. A controls Op Co.
Mr. A and Op Co do not deal at arm’s length with each other. The rent expenses that Op Co. pays to Mr. A are not eligible expenses for CERS.
A person with a controlling interest in a partnership
Mr. A has a controlling interest in Partnership A. Partnership A rents a building that is owned by Mr. A (or vice versa).
Mr. A is not dealing at arm’s length with Partnership A. The rent expenses that Partnership A pays to Mr. A are not eligible expenses for CERS.
Learn more in paragraph 1.43 of Related persons and dealing at arm’s length (Income tax folio S1-F5-C1)
One corporation owns another corporation
Mr. A and Mrs. A (spouses) each own 50% of the shares of Hold Co. Hold Co owns 100% of the shares of Op Co. Hold Co owns a building and Op Co pays rent to Hold Co. Mr. A and Mrs. A are related by virtue of marriage. Mr. A and Mrs. A are a related group that controls Hold Co.
Since Hold Co owns all of the shares of Op Co, Hold Co controls Op Co. Hold Co and Op Co do not deal at arm’s length.
Partnership owned equally between unrelated persons
Mr. A, Mr. B, and Mr. C are not related. They each own 1/3 of the voting shares of Op Co. Op Co pays rent to Mr. C. Mr. C and Op Co are not related.
It is a question of fact whether Mr. C and Op Co are dealing at arm’s length. Additional factors will need to be considered. For example, if Mr. C and Op Co are acting in concert without separate interest in respect of the rental transaction they may not be dealing at arm’s length.
Learn more in paragraphs 1.37 to 1.40 of Related persons and dealing at arm’s length (Income tax folio S1-F5-C1)
One person owns 2 corporations
Mr. A owns 100% of the shares of Op Co and 100% of the shares of Hold Co. Op Co pays rent to Hold Co (or vice versa). Op Co and Hold Co are related, because both corporations are controlled by the same person (Mr. A).
Op Co and Hold Co do not deal at arm’s length.
Separate corporations owned by spouses
Mr. A owns 100% of the shares of Op Co. Mrs. A (Mr. A’s spouse) owns 100% of the shares of Hold Co. Op Co pays rent to Hold Co (or vice versa). Op Co and Hold Co are related since the individual that controls Op Co (Mr. A) is related to the individual that controls Hold Co (Mrs. A) by marriage.
Op Co and Hold Co do not deal at arm’s length.
Two unrelated people own 50% each of 2 corporations
Mr. A and Mr. B are not related. Mr. A and Mr. B each own 50% of the shares of Op Co and Hold Co. Mr. A and Mr. B act in concert to control Op Co and Hold Co. Op Co pays rent to Hold Co (or vice versa). Op Co and Hold Co are related since each corporation is controlled by the same unrelated group.
Op Co and Hold Co do not deal at arm’s length.
One person is related to each person in an unrelated group
Mr. A owns 100% of the shares of Op Co. Mr. X and Mr. Y (both grandchildren of Mr. A) each own 50% of the shares of Hold Co. Mr. X and Mr. Y are cousins who act in concert to control Hold Co. Cousins are not related for tax purposes. Op Co pays rent to Hold Co (or vice versa).
Op Co and Hold Co are related. Mr. A controls Op Co and Hold Co is controlled by an unrelated group. However, Mr. A is related to each member of the unrelated group that controls Hold Co since they are his grandchildren.
Op Co and Hold Co do not deal at arm’s length.
Unrelated groups include people who are related to members of the other group
Mr. A and Mr. B are not related and each own 50% of the shares of Op Co. Mr. A and Mr. B act in concert to control Op Co. Mrs. A and Mrs. B (spouses of Mr. A and Mr. B) each own 50% of the shares of Hold Co. Mrs. A and Mrs. B act in concert to control Hold Co.
Op Co pays rent to Hold Co (or vice versa). Op Co and Hold Co are related because each member of the unrelated group that controls Op Co is related to at least one member of the unrelated group that controls Hold Co.
Op Co and Hold Co do not deal at arm’s length.