How do associated corporations divide the $500,000 small business limit between them?

Associated corporations don't each get their own separate $500,000 small business limit, the Income Tax Act requires them to share a single limit between them, and the way it's actually divided is generally set out in an agreement the associated corporations file with CRA, assigning a specific portion of the combined limit to each corporation for the purposes of accessing the lower small business tax rate.

If the associated corporations file an agreement allocating the limit, CRA will generally respect that allocation, letting the group decide, within limits, how to divide access to the lower rate in a way that reflects their actual business needs. If they don't file an agreement, or can't reach one, CRA has the authority to assign the limit among the corporations itself, and that CRA-imposed allocation may not match what the corporations would have chosen, and can produce a less favourable overall result.

Because filing an agreement gives the associated group meaningful control over how the shared limit is split, and because the split can materially affect each corporation's tax bill, working out and filing this allocation deliberately each year, rather than leaving it to default, is generally the sounder approach for a group of associated corporations.