Principal Issues: Whether property income earned by a unit trust and paid to its beneficiaries is always included in the aggregate investment income of a corporation under subsection 129(4)?
Position: No
Reasons: Exceptions in paragraph (b) of "income" as defined in subsection 129(4) could apply depending on the circumstances.
XXXXXXXXXX 2005-015356 R. Gagnon February 13, 2006
Dear Sir,
Subject: Refundable Dividend Tax on Hand
This is in response to your letter of September 30, 2005, in which you asked whether, in the situation described below, the corporation's income from a trust should be included in its "aggregate investment income" as defined in subsection 129(4) of the Income Tax Act. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Assumptions
1. Opco is a "taxable Canadian corporation" as defined in subsection 89(1) and a "Canadian-controlled private corporation" as defined in subsection 125(7).
2. UT is a "unit trust" as defined in subsection 108(2). UT satisfies the conditions set out in paragraph 108(2)(b).
3. UT's only business is acquiring, holding, maintaining, improving, leasing or managing real property in Canada or interests therein that is capital property (as defined in section 54) of UT.
4. Opco has an interest in UT represented by units of UT.
5. The taxation year end of Opco and UT is December 31.
6. The net income of UT that was earned in its 2005 taxation year was distributed to the unitholders of UT in 2005. The net income of UT was derived exclusively from the rental of properties owned by UT. UT's net income from the rental of real property constituted income from property to UT, and not income from a business.
7. The amounts received in 2005 by Opco from UT were included in its income pursuant to paragraph 12(1)(m) and subsection 104(13).
Your Opinion
You are of the view that in the situation described above, Opco's income from UT would automatically be included in computing its "aggregate investment income" within the meaning of the definition in subsection 129(4) of Opco, because the exception in subparagraph (b)(iv) of that definition would not apply.
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received the appropriate tax treatment. We can, however, offer the following general comments which may not apply in full to the present situation.
The "aggregate investment income", as defined in subsection 129(4), of a corporation for a taxation year is the amount by which the total of the amounts in paragraphs (a) and (b) of that definition exceeds the total of all amounts, each of which is the corporation's loss for the year from a source that is property. Paragraph (b) of the definition of "aggregate investment income" includes any income for the year from a source that is a property, except, inter alia, "(iv) income that, but for paragraph 108(5)(a), would not be income from a property."
The definition of "income" in subsection 129(4) provides that the
"income … of a corporation for a taxation year from a source that is a property
(a) includes the income or loss from a specified investment business carried on by it in Canada other than income or loss from a source outside Canada, but
(b) does not include the income or loss from any property
(i) that is incident to or pertains to an active business carried on by it, or
(ii) that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.”
The definition of "active business" in subsection 248(1), which applies for the purposes of subsection 129(4), includes any business carried on by a taxpayer other than a specified investment business.
In the situation described above, we do not have sufficient facts to determine with certainty whether Opco's income from UT would be included in computing its "aggregate investment income" as defined in subsection 129(4).
In our view, a corporation's income from a trust, as in the situation described above, would not automatically be considered to be income of the corporation from a source that is a property, to be included in computing its "aggregate investment income" within the meaning of the definition in subsection 129(4). In particular, we are of the view that the exceptions in paragraph (b) of the definition of "income" in subsection 129(4) could be applicable depending on the circumstances, even though the only income allocated to the corporation by the trust would be income from property earned by the trust.
For example, in a situation such as the one described above, the corporation's income from the trust would not be included in the computation of its total investment income if that income was incidental to an active business carried on by it.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA with respect to any particular factual situation.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch