Principal Issues: 1.Will rental income and management fees received by a corporation from an associated corporation be considered income of the corporation from an active business. 2. Whether the small business deduction must be shared by associated corporations.
Position: 1. Question of fact. 2. Yes
Reasons: 1 and 2 – The law
XXXXXXXXXX 2011-042415 S. D’Angelo (613)952-5803 November 30, 2011
Dear XXXXXXXXXX :
Re: Active Business Income / Small Business Deduction
This is in response to your correspondence of October 13, 2011 and our phone conversation of November 22, 2011 (XXXXXXXXXX /D’Angelo), wherein you requested our views on whether certain income from property would be considered income of a corporation from an “active business” as defined in subsection 125(7) of the Income Tax Act (the “Act”) and whether the small business deduction (“SBD”) in subsection 125(1) of the Act must be shared by associated corporations.
Our Comments
The Canada Revenue Agency’s (“CRA”) comments on the SBD can be found in Interpretation Bulletin, IT-73R6, The Small Business Deduction. Regarding the claim of the SBD by any particular corporation, there are a number of conditions that must be satisfied. For example, the SBD may only be claimed by a corporation that was throughout the taxation year a “Canadian-controlled private corporation” (“CCPC”) in respect of “income of the corporation for the year from an active business” carried on by it in Canada.
Active Business Income
The expression “active business carried on by a corporation” means any business carried on by a corporation other than a specified investment business (“SIB”) or a personal services business (“PSB”).
A SIB, defined in subsection 125(7) of the Act, generally means a business carried on by a corporation in a taxation year the principal purpose of which is to derive income from property, such as rental income, unless the corporation meets one of two conditions:
(a) the particular corporation employs in the business throughout the taxation year more than 5 full-time employees; or
(b) another corporation associated with the particular corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the particular corporation in the year and it is reasonable to assume that the particular corporation would have required more than 5 full-time employees in its business if those services had not been provided.
Whether or not the rental income received by a particular corporation is income from an “active business” is a question of fact that can only be determined after an examination of all the relevant facts in the particular situation. Generally, a corporation would be seen as earning income from property if it only rents space and provides basic services. Basic services include heat, light, parking, and laundry facilities. However, if it provides additional services to tenants, such as cleaning, security, and meals, it may be carrying on a business. Paragraph 2 to 8 of Interpretation Bulletin, IT-434R, Rental or Real Property by Individual, may provide guidance with respect to determining whether a rental operation is a source of business income or of property income.
Notwithstanding the above, the rules in subsection 129(6) of the Act provide, inter alia, that, for the purposes of subsection 129(4), in computing the recipient corporation's income from property from a source in Canada, such income will not include any portion of an amount that was or may be deductible ("deductible portion") in computing income from an active business carried on in Canada by an associated corporation and that, for the purposes of section 125 and subsection 129(6) of the Act, the deductible portion will be deemed to be income from an active business of the recipient corporation.
Sharing of the business limit among associated corporations
For the purpose of section 125, subsection 125(2) of the Act defines the business limit for a corporation for a taxation year. If two or more CCPCs are associated with one another in a taxation year, the SBD must be shared, by allocating the annual business limit amongst the corporations for the taxation year. Information with respect to the sharing of the business limit among associated corporations can be found in paragraphs 23 to 26 of IT-73R6.
We trust our comments will be of assistance.
Yours truly
Michael Cooke
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch