Related party

What it means

A related party is a person connected to the taxpayer economically, personally or otherwise under the Income Tax Act: parent and subsidiary, companies sharing a member, close persons, and also a relationship created solely to reduce tax.

The consequence is single but fundamental: prices in transactions between such parties must meet the arm’s length principle - what unconnected parties would have agreed.

Relatedness is judged by the real relationship, not by how the companies look from outside. What counts is a stake in capital or voting rights above the statutory threshold, the same person on the statutory body or supervisory body of both firms, or a close family tie. A long-standing key customer without such a link is not a related party, even if the company depends on it economically.

How it works in practice

The rule applies to purely domestic relationships too: two companies with the same owner, renting the director’s property to the company, a loan from a member. Each is a controlled transaction subject to transfer pricing.

The extent of the duties depends on size and transaction volume, but the minimum is a record and the ability to defend the price. Cross-border relationships add the question of tax residency and the scope of the documentation.

When we take over the books of a new client, we first map its connections: which companies the same member owns, where the director also sits on another board, and which family members provide services or rent premises to the company. That map shows which contracts need a price justification ready before any audit.

What to watch out for

The cases most often overlooked: renting the owner’s property to the company at an "agreed" price, management fees between affiliated firms, and interest-free loans. All are inspection targets, and all are eliminated in consolidation too.

The amount by which the tax office adjusts the base is assessed together with a penalty, for every year the unsuitable price was used. Because an audit can reach several years back, an undervalued lease or a zero interest rate is multiplied by each year nobody reviewed it.