There are many situations where two companies are associated when that was never the intention of the shareholders. Sometimes association occurs unintentionally where there is an estate freeze. Usually, the parent who owns the common shares exchanges his or her shares for frozen preferred shares. The parent's children or a trust for the benefit of the children usually purchases the common shares of the company. Depending on the attributes of the preferred shares, the operating company may still be associated with other companies owned by the parent. In those situations where the parent truly gives up control of the company to his/her kids, this is an unintentional result.
It is possible, however, to ensure that the operating company being frozen is not associated with the other companies held by the parent. If the frozen shares that the parent takes back are a "specified class," then the parent's investment in the operating company is not considered in determining if that company is associated with the other companies. Pursuant to subsection 256(1.1), a specified class must have the following attributes:
Shares are not convertible or exchangeable;
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.