Arm’s-length vs. non-arm’s-length deductions

An arm's-length deduction: This refers to the bargaining position of two unrelated parties whose mutual dealings are only influenced by their independent interests. It describes a standard of dealing that reflects no motivation other than those normally expected on the part of two unconnected parties transacting in good faith in the ordinary course of business.

Non-arm’s-length deductions: For purposes of the Income Tax Act, two or more individuals are related and not dealing at arm’s length if any of the following is true:

1. One is the child or other descendant of the other.
2. They are siblings.
3. They are married to each other (includes common law).
4. One is married to a person who is connected to the other, as described in point 1 and 2 (mother/father/brother/sister-in-law).
5. One has been adopted by the other, or by some person connected to the other as described in point 1.

Last updated on August 16, 2013 by FCC AgExpert