Maggie Limited is owned 50% by Barb Limited and 50% by John Limited. Barb Limited and John Limited are 100% owned by Barb and John, respectively. Barb and John are married. Maggie Limited derives all of its income from active business carried on in Canada. It rents facilities from Barb Limited to which it pays $120,000 in annual rent, deducting this amount as a business expense. Maggie Limited also pays annual dividends of $30,000 to each of Barb Limited and John Limited. The dividend income of $30,000 is the only other income of either Barb Limited or John Limited.

Required:

(1) Determine whether the corporations described above are associated. Describe the reasons for your conclusion, in detail. Substantiate your determination by reference to specific conditions in the Act. Marks will be awarded for diagrams of the relationships.

(2) Assuming that Maggie Limited, Barb Limited, and John Limited are all associated with each other, what is the nature of the rental income earned by Barb Limited from Maggie Limited?