SellCo A and SellCo B sell all of their fishing catch to BuyCo (also a CCPC), although BuyCo 1 purchases the majority of its fish from unrelated parties. In the 1st situation, Individual (“T”) owns 30% of BuyCo, 100% of SellCo A and less than 50% of SellCo B. In the 2nd situation, K owns 65% of BuyCo, K’s brother owns 100% of SellCo A and K’s son owns 100% of SellCo B.
CRA noted that under s. 125(1)(a)(i)(B), generally where a CCPC earns income that would otherwise be considered as income from an active business from the provision of property or services to another private corporation and it (or one of its shareholders) or a person who does not deal at arm’s length with the CCPC (or one of its shareholders) holds a direct or indirect interest in that other private corporation, such income would not be considered as being eligible for the SBD (in the absence of an assignment all or a portion of its business limit to the CCPC under s. 125(3.2)) unless all or substantially all of the CCPC’s income for the year from an active business is from the provision of services or property to persons (other than that private corporation) with which the CCPC deals at arm’s length, or partnerships with which the CCPC deals at arm’s length, other than a partnership in which a person that does not deal at arm’s length with the CCPC holds a direct or indirect interest. CRA stated that in each situation:
[T]he income earned by each SellCo would not be eligible for the SBD unless (and only to the extent) that the particular BuyCo was able (and actually did) make an assignment of all or a portion of its business limit to that SellCo under subsection 125(3.2) of the Act.