How To Remain Compliant When Not Acting At Arm's Length

For tax purposes, the Canadian Revenue Agency requires businesses to complete all transactions at fair market value, but some businesses find themselves making special arrangements with family, friends or others. By not acting at arm’s length, they may wind up with understated revenue, overstated expenses and/or unrecorded tax liabilities. Any error in this area is subject to reassessment, which can be an extremely expensive process.

With that in mind, companies should always keep track of all transactions, in case there is any need for future reassessment. This is also necessary for the purposes of documentation and allocating the small business deduction. More importantly, businesses should develop an understanding of what it means to not act at arm’s length – and what can be done to address any past reporting errors.