The sixty-second answer
Subsection 256(1) sets five tests, and meeting any one at any time in the year makes two corporations associated. Several turn on a related person plus at least 25% of a non-specified class of shares in each company. Critically, "controlled" is not limited to a voting majority: subsection 256(5.1) reaches influence that, if exercised, would result in control in fact. Association makes the business limit nil by default, aggregates the passive-income grind, and can cost the group a month of payment time.
Why this question has real money attached
Association is not a labelling exercise. Subsection 125(2) sets the business limit at $500,000 unless the corporation is associated with one or more other CCPCs, in which case the default is nil [2].
The group escapes nil only by jointly filing a prescribed-form agreement under subsection 125(3) allocating percentages among themselves. And if the assigned percentages total more than 100%, every corporation in the group gets nil [2].
So the cost of getting association wrong is not proportionate. A group that believed itself unassociated, and in which each company claimed the full $500,000, has collectively allocated several hundred percent. The consequence under subsection 125(3) is nil for everyone.
The five tests
Subsection 256(1) associates one corporation with another in a taxation year if, at any time in the year, any one of the following holds [1].
(a) One controls the other. Where one of the corporations controlled, directly or indirectly in any manner whatever, the other.
(b) A common controller. Where both corporations were controlled, directly or indirectly in any manner whatever, by the same person or group of persons.
Those two are the intuitive cases. The remaining three are where groups get caught.
(c) Related controllers plus cross-ownership. Each corporation is controlled by a person, those two persons are related to each other, and either of them owns not less than 25% of the issued shares of any class, other than a specified class, in each corporation.
(d) A person related to every member of a controlling group. One corporation is controlled by a person who was related to each member of a group of persons that controlled the other, and that person owns at least 25% of the issued shares of any non-specified class of the other corporation.
(e) Two related groups with overlapping members. Each corporation is controlled by a related group, every member of one group is related to all members of the other, and one or more persons belonging to both groups own, alone or together, at least 25% of a non-specified class in each corporation.
Relatedness alone is not enough
A point worth stating clearly, because it is often assumed the other way. In tests (c), (d) and (e), relatedness between the controllers does not by itself associate the corporations. The statute additionally requires a 25% equity connection [1].
Two siblings each owning their own company outright, with no cross-shareholding, are not associated under those tests. The 25% threshold operates as a substantive-connection filter, so that family kinship without economic interconnection does not automatically associate separate businesses.
That said, tests (a) and (b) have no 25% requirement, and de facto control may still connect structures that look independent.
Specified class shares are ignored
The 25% tests exclude shares of a "specified class", defined in subsection 256(1.1) through cumulative conditions: non-convertible, non-exchangeable, non-voting, dividends calculated as a fixed amount or a fixed percentage of issue-date fair market value, an annual dividend rate not exceeding the prescribed interest rate at issuance, and redemption entitlement capped at issue value plus unpaid dividends [1].
Shares meeting all of that resemble debt more than an equity participation, which is why they are properly disregarded when measuring connection. Frozen preferred shares from an estate freeze will often, though not always, fall into this category - the conditions are cumulative and all of them must be satisfied.
Control reaches influence, not just votes
This is the provision that surprises people most. Subsection 256(5.1) provides that a person controls a corporation directly or indirectly in any manner whatever where that person has any direct or indirect influence that, if exercised, would result in control in fact of the corporation [1].
Subsection 256(5.11) reinforces the breadth, directing that the analysis take into consideration all factors that are relevant in the circumstances, and clarifying that the inquiry is not confined to whether the taxpayer holds a legally enforceable right to change the board of directors or its powers [1].
De facto control is therefore a facts-and-circumstances assessment. Economic dependence, funding relationships, and practical decision-making authority can all be relevant. A corporation whose share register shows an unrelated majority owner is not thereby safe.
There is a carve-out. Influence arising from a franchise, licence, lease, distribution, supply, management or similar agreement whose main purpose is to govern how a business is conducted does not by itself create control, where the parties deal at arm's length [1]. Ordinary commercial arrangements are not caught.
Deeming rules that catch structures
Three more provisions reshape the analysis [1].
Value-based control. Subsection 256(1.2) deems control where shares representing more than 50% of the fair market value of all issued shares, or of all common shares, are held. Paragraph 256(1.2)(g) directs that in valuing shares, all issued and outstanding shares are deemed to be non-voting. Voting structures designed around control therefore do not survive a fair-market-value test.
Minor children. Subsection 256(1.3) attributes shares held by a child under 18 to a parent, unless it can reasonably be considered that the child manages the business and affairs of the corporation without a significant degree of influence by the parent. For a minor that exception will rarely apply.
Options and rights. Subsection 256(1.4) deems options and contractual rights to shares to have been exercised, subject to exceptions where exercise is contingent on death, bankruptcy or permanent disability. An unexercised buy-out option can associate corporations today.
Association does more than split the limit
Four consequences flow from it, and the business limit is only the first.
The limit defaults to nil and must be allocated by agreement under subsection 125(3), with total loss if the percentages exceed 100% [2]. Under subsection 125(4), if the group ignores a ministerial demand for an agreement for 30 days, the Minister allocates [2].
The passive-income grind aggregates. Subsection 125(5.1) computes the investment-income reduction on the aggregate adjusted aggregate investment income of the corporation and every corporation associated with it, and measures taxable capital across the group [2]. An operating company can lose its business limit because of investments held in a sister holdco.
Quarterly instalments aggregate. Subsection 157(1.2) tests taxable income against $500,000 and taxable capital against $10 million, each aggregated across associated corporations [3]. Association can cost a company its quarterly instalment eligibility.
The three-month balance-due day aggregates. Subclause (d)(i)(C)(II) of the balance-due day definition tests the combined taxable incomes of the group for their last taxation years ending in the preceding calendar year against the aggregate of their business limits [4]. Association can cost a month of payment time.
What this means in practice
The allocation agreement is the mechanism, and it requires something a group often does not have in time: each company's position, before the limit is divided.
A group filing its corporations at intervals, through different preparers, with different year ends, is making the allocation decision with incomplete information. The failure mode is over-allocation, and the penalty for that is total.
Whether the corporations are associated is a question for an advisor who can see the share register, the family tree and the commercial relationships. It is not a question to settle by intuition, given what subsection 256(5.1) reaches.
What you can control is that every entity's figures exist in one place and at the same time. That is the practical case for handling a group's returns together rather than separately, and it is the structure MapleTax Unlimited is priced for: unlimited T1 and T2 returns on one annual fee, with the underlying expense and revenue records for each entity already held across MapleWorkSuite. The association question still needs an answer. Acting on it correctly needs the numbers to be in front of you at once.