Tax on Related Party Transactions

If you own multiple corporations by yourself or with family members, then this article is for you.  In this article, I will explain the tax treatment of transactions between related corporations.

Two corporations are related to each other for tax purposes, when they are owned by the same person or by separate persons who are related by blood. Take the example of Sam and Jill, a married couple.  Sam owns a medical supplies company in Toronto, and Mary is a cosmetic surgeon with her own practice in the GTA.  Both are incorporated.  Sam comes up with the idea of selling medical supplies to Mary’s corporation for a really low price, to increase her corporate profits.

Is this scheme allowed?  The answer is “No”.  According to the Income Tax Act, the prices charged on the sale of goods and services must be according to market rates. In other words, Sam has to sell medical supplies to Sally at the same price that he does to other customers.  This is the market value principle.

Supporting documentation – what type of records do you need to keep? In the event of an audit, you will be asked to provide copies of:

• Sales Invoices;
• Purchase orders;
• Cheques issued; and
• Deposit slips.

The auditor will also ask you to show how you came up with prices charged on related party sales.  Print outs from the Internet of competitor pricing or copies of invoices that you issued to your non-related customers is sufficient evidence.

Some common examples of transactions between related corporations include:

• A management corporation providing support services to a related corporation
• A corporation that owns office space, which it rents to a related corporation
• A corporation that sell supplies, which are used by another related corporation to manufacture products

So here’s the tip:

Make sure that you charge market prices between related corporations and keep supporting documentation, which will be needed in the event of an audit.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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