Associated Corporations Small Business Limit Calculator 2026
Two corporations does not mean two $500,000 limits. Test whether your companies are associated, see the extra tax if they are, and get the Schedule 23 allocation that wastes none of the limit across the group.
extra tax from association
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Suggested Schedule 23 Allocation
| Corporation | Active Income | Federal Limit Allocated | Share of Limit | Taxed at 12.2% | Taxed at 26.5% | Tax Payable |
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How the Business Limit Was Reduced
| Step | Basis | Federal | Ontario |
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Association Test Applied
| Question | Your Answer | Result |
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What Else This Changes
What to Do Next
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Disclaimer: This calculator applies section 256 of the Income Tax Act for association, section 125 for the small business deduction, the $500,000 business limit, the taxable capital reduction above $10,000,000 phasing out at $50,000,000, and the adjusted aggregate investment income reduction of $5 for every $1 above $50,000. The business limit is reduced by the greater of the two reductions. Ontario does not parallel the investment income reduction, so the federal and Ontario limits are computed separately using combined rates of 12.2% and 26.5%. Association is a question of law applied to the specific share register, including options, rights, trust holdings and de facto control under subsection 256(5.1), and the structure options here are simplified. A determination should never be made from a summary. This page is general information, not tax advice.
Two Corporations Does Not Mean Two Limits
The small business deduction reduces the tax rate on the first $500,000 of active business income from 26.5% to 12.2% in Ontario. That is a saving of $71,500 a year when the full limit is used.
Owners who set up a second corporation frequently assume the group now has $1,000,000 of limit. Where the corporations are associated, they have $500,000 between them, and the difference is assessed with interest when the CRA notices.
Association has nothing to do with whether the businesses are related commercially. A restaurant and a trucking company owned by the same person are associated. Two unconnected consultancies owned by the same person are associated. What matters is control and cross-ownership, not what the companies do.
When Corporations Are Associated
Subsection 256(1) sets out five situations. Any one of them makes two corporations associated for the year.
| Paragraph | Situation |
|---|---|
| 256(1)(a) | One corporation controls the other |
| 256(1)(b) | Both are controlled by the same person or group of persons |
| 256(1)(c) | Each is controlled by a person, the two persons are related, and one of them owns 25% or more of any class of shares of each corporation |
| 256(1)(d) | One is controlled by a person related to each member of a group controlling the other, and that person owns 25% or more of any class of the other |
| 256(1)(e) | Each is controlled by a related group, the members are related across both groups, and a common member owns 25% or more of any class of each |
Control means more than 50% of the voting shares. Subsection 256(1.2) extends that to a person who owns shares with a fair market value exceeding 50% of all the shares, and subsection 256(5.1) adds de facto control, which captures influence that falls short of legal control.
Related Is Not the Same as Associated
This is the point that saves the most money and is most often misunderstood. Being related does not by itself make two corporations associated. Paragraph 256(1)(c) requires both a related relationship and cross-ownership of 25% or more.
| Structure | Associated | Why |
|---|---|---|
| You own 100% of A and 100% of B | Yes | Same person controls both, paragraph (b) |
| Your holdco owns 100% of your opco | Yes | One controls the other, paragraph (a) |
| You own 100% of A, spouse owns 100% of B, neither holds shares of the other | No | Related, but no cross-ownership of 25% |
| You own 100% of A, spouse owns 100% of B, you also own 30% of B | Yes | Related plus 25% cross-ownership, paragraph (c) |
| Your child under 18 holds shares in both | Yes | Those shares are deemed owned by the parent |
The spouse structure without cross-ownership genuinely works. Two separate corporations, each genuinely controlled by a different spouse, with no shareholdings in each other, are not associated and each has its own $500,000 limit. What defeats it is a small cross-shareholding put in for convenience, a share held by a minor child in both, or de facto control where one spouse actually runs both businesses.
The Third Corporation Rule
Subsection 256(2) deems two corporations associated with each other where both are associated with the same third corporation. A holding company sitting above two otherwise separate operating companies pulls all three into one group.
The third corporation can elect out, which stops the other two from being associated with each other, but the price is that the third corporation’s own business limit is deemed to be nil. That trade is worth modelling rather than assuming.
Schedule 23 and What Happens Without It
Associated CCPCs must file an agreement allocating the business limit among themselves. The form is Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit, and it is filed with the T2.
Where no agreement is filed, the Minister may allocate the limit, and there is no obligation to allocate it the way you would have chosen. Inconsistent allocations across the group, where two corporations each claim more than their share, are among the easiest things for the CRA to detect and among the most common reassessments in this area.
The Two Grinds on the Limit
| Reduction | Trigger | Rate | Fully Eliminated At |
|---|---|---|---|
| Taxable capital | Group taxable capital above $10,000,000 | Straight-line reduction | $50,000,000 |
| Investment income | Group adjusted aggregate investment income above $50,000 | $5 of limit per $1 of income | $150,000 |
The business limit is reduced by the greater of the two, not the sum. Both are tested on the combined figures of the whole associated group, which is another reason association matters beyond the limit itself.
Ontario Does Not Parallel the Investment Income Grind
Ontario declined to adopt the federal passive income measure. The Ontario small business deduction limit therefore stays at $500,000 regardless of investment income, while the federal limit grinds away.
The practical effect is that a corporation with significant investment income pays the federal general rate on income that still qualifies for the Ontario small business rate. This calculator computes the two limits separately for that reason, which is why the effective rate on some income sits between 12.2% and 26.5%.
What Else Gets Shared Across an Associated Group
- The $500,000 business limit, allocated on Schedule 23
- The Ontario employer health tax exemption of $1,000,000, allocated by written agreement
- The $50,000 investment income floor, tested on combined group income
- The $10,000,000 taxable capital threshold, tested on combined group capital
- The scientific research expenditure limit, where the group claims SR&ED
- Filing obligations, since Schedule 9 and Schedule 23 must be consistent across every return in the group
What This Calculator Does Not Cover
- De facto control under subsection 256(5.1), which is fact-specific and frequently decisive
- Options and rights to acquire shares, which are treated as exercised for association purposes
- Shares held through trusts, which have their own attribution rules
- Specified corporate income rules, which can restrict the limit where income comes from a related private corporation
- Provinces other than Ontario, which have different rates and in some cases different limits
- Partnership structures and the specified partnership income rules
Get the determination made once, in writing. If the corporations are associated and have each been claiming a full limit, the CRA can reassess with interest. If they are genuinely not associated, you want that documented before anyone asks. Our tax planning service covers the association review, the Schedule 23 allocation and the group filings.
Frequently Asked Questions
Common questions from owners running more than one corporation.
Related Calculators and Guides
More tools for owners with more than one corporation.
Get the Determination Once, in Writing
If the corporations are associated and each has been claiming a full limit, the CRA can reassess with interest. If they are genuinely not associated, you want that documented before anyone asks. Send us the share registers and we will confirm the position.