Associated Companies: The Good, The Bad, and The Taxable

If you’re a creative entrepreneur with big ideas and more than one passion, the thought of starting a second business probably feels exciting — maybe even inevitable. Whether it’s a new income stream, a different audience, or a completely separate type of service, branching out can feel like a natural next step.

But before you dive in, it’s important to understand what happens when you create a second operating company. That new business doesn’t just stand on its own — it becomes an associated or sister company to your existing one. And with that comes a new layer of complexity, especially around structure, tax, and strategy.

Let’s break down what you need to know before you make the leap — the good, the not-so-good (bad), and the taxable.

What Are Associated or Sister Companies?

Sister companies are two or more companies that are owned by the same parent company or the same shareholder or group of shareholders.

Why Use Sister Companies (The Good)

• Separate different business lines (e.g., design services in one, product sales in another).

• Reduce risk by keeping liabilities in one company from affecting the other company.

• Create tax planning or organizational flexibility — like transferring profits via management fees or dividends.

• Easier to sell or restructure parts of the business without affecting the other company.

 When to desist from Incorporating a Sister Company (The Bad)

1. You’re just starting out or have low revenue. Multiple companies mean higher costs — legal, accounting, and admin. If you're not yet profitable, it’s often better to keep things under one roof.

2. Your businesses are too intertwined. If they share staff, space, or clients, it can be hard to prove they’re truly separate. This can create tax and compliance headaches.

3. It complicates things without real benefit. If there’s no clear strategic reason to separate them, it can become a burden.

When Sister companies share (The Taxable)

1. You're splitting the Small business deduction amongst the sister companies: Your sister companies are associated — meaning they’re owned by the same people or a holding company — AND they also share the $500,000 small business deduction.

In other words, you don’t get the tax break twice. It’s one shared limit across all your related companies, no matter how many you have.

 2. You’re trying to income split or shift profits improperly. Transferring money between sister companies using management fees or dividends can attract CRA attention if not done properly. You must show real business purpose.

In Summary

Sister companies can be powerful when used strategically, but if you're trying to simplify or save on tax, they can sometimes do the opposite. Always consider costs, complexity, and CRA rules before setting up sister companies.

Are you thinking of opening a sister company? Contact us for help!