If you’re a Canadian taxpayer and have been involved in a non-arm’s length transaction or relationship, you may have some questions about how it affects your taxes. In this blog post, we’ll cover everything you need to know about non-arm’s length relationships and transactions, and how they can impact your tax situation.

What is a Non-Arm’s Length Transaction?

A non-arm’s length transaction is a type of transaction that occurs between two parties who have a relationship with each other, such as family members, business partners, or a corporation and its shareholders. The relationship between the parties can affect the terms of the transaction, such as the price or payment terms. In a non-arm’s length transaction, the parties may not be dealing with each other at arm’s length, meaning that they may not be acting independently and may have a conflict of interest.

For example, let’s say that you own a business and you sell a piece of equipment to your brother for $5,000. If you were dealing with an unrelated party, you may have sold the equipment for $10,000. This transaction is considered a non-arm’s length transaction because you and your brother have a relationship, and the terms of the transaction may not be at arm’s length.

What is a Non-Arm’s Length Relationship?

A non-arm’s length relationship refers to a relationship between two parties who have a close personal or business relationship with each other. The relationship can be between family members, business partners, or a corporation and its shareholders. In a non-arm’s length relationship, the parties may not be dealing with each other at arm’s length, meaning that they may not be acting independently and may have a conflict of interest.

For example, if you own a business and your spouse is a shareholder in the business, you have a non-arm’s length relationship. If you hire your brother to work for your business, you also have a non-arm’s length relationship.

How do Non-Arm’s Length Relationships and Transactions Impact Your Taxes?

When you’re involved in a non-arm’s length relationship or transaction, it can impact your taxes in several ways. The Canada Revenue Agency (CRA) has specific rules for non-arm’s length transactions and relationships to ensure that the parties are paying the appropriate amount of tax.

One of the biggest impacts is on the fair market value (FMV) of the property or services being exchanged. The FMV is the price that would be paid for the property or service if it were being sold on the open market. In a non-arm’s length transaction, the FMV may be different than the price that was actually paid. The CRA has rules to ensure that the FMV is used to determine the tax implications of the transaction.

Additionally, if you’re involved in a non-arm’s length transaction, you may not be able to claim certain tax deductions or credits. For example, if you’re paying rent to a family member for a property, you may not be able to claim the rent as a tax deduction. Similarly, if you’re in a non-arm’s length relationship, you may not be able to claim certain business expenses that you would be able to claim if you were dealing with an arm’s length party.

What Should You Do if You’re Involved in a Non-Arm’s Length Relationship or Transaction?

If you’re involved in a non-arm’s length relationship or transaction, it’s important to understand the rules and regulations surrounding these types of transactions. The CRA has specific guidelines and rules that you need to follow to ensure that you’re paying the appropriate amount of tax.

If you’re unsure about whether a transaction or relationship is considered non-arm’s length, it’s always a good idea to speak with a tax professional or accountant.