How do the associated corporation rules affect how many companies can share the small business deduction?

When two or more corporations are "associated" with each other under the Income Tax Act's associated corporation rules, they don't each get their own separate access to the small business tax rate, instead, they must share a single business limit, currently the first $500,000 of active business income taxed at the lower small business rate, between them, allocated according to an agreement the corporations file with CRA.

Association generally turns on control and specific relationships between the people who own the corporations, not simply on whether the businesses operate independently or serve different markets, corporations owned by the same person, by closely related people, or by groups acting together can all end up associated even if they run entirely separate operations day to day. The point of the rule is to prevent someone from simply setting up multiple corporations to multiply access to the lower small business rate on income that, in substance, is all controlled by the same person or family.

If the corporations don't file an allocation agreement, or can't agree on how to split the limit, CRA can assign the shared limit itself, which may produce a less favourable result than the corporations working out their own allocation, so filing an agreement is generally the better approach.