| 24(1) | File No. 5-9463 |
| C.R. Bowen | |
| (613) 957-2096 |
19(1)
May 30, 1990
Dear Sirs:
Re: Active Business Income
We are writing in reply to your letter of January 18, 1990, wherein you requested our comments on whether management fees received by several corporations for managing rental property will be income from an active business for the purposes of paragraphs 125(7)(a) and (c) of the Income Tax Act (the "Act").
Our understanding of the facts given to illustrate the issue is as follows:
1. Four Canadian-controlled private corporations ("Corporations A, B, C, and D") are equal partners of a partnership ("Partnership X") which carries on a business that would normally be an active business.
2. Partnership X rents land and buildings from a holding company ("Company Y"). The shares of Company Y are equally owned by Corporations A, B, C, and D.
3. The rental income earned by Company Y is inactive income. In addition, as the rental income is received from Partnership X, it can not be deemed to be active income by virtue of paragraph 129(6)(b) of the Act. Company Y pays a management fee of equal amounts to Corporations A, B, C, and D.
4. The only significant business activity of Corporations A, B, C, and D is through the operations of Partnership X and Company Y. Corporations A, B, C, and D each have one or two employees.
Your Question
Is the management income received by Corporations A, B, C, and D from Company Y considered to be income of each corporation from an active business.
Our Comments
While we are unable to provide confirmation of the income tax effects of the particular situation outlined in your letter, we can provide the following general comments related to the income from an "active business" for the purposes of paragraphs 125(7)(a) and (c) of the Act.
Whether a Canadian-controlled private corporation ("CCPC") carries on an "active business" is a question of fact which can only be determined after an examination of all the relevant facts in a particular situation on a retrospective basis. However, when a CCPC does not carry on a "specified investment business" or a "personal services business", its income received as management fees based on actual services provided will normally be considered income from an "active business". On the other hand, where in an actual fact situation the arrangement has been set up primarily to change income received by one corporation from an inactive business into "active business" income to another corporation, the Department will consider applying subsection 245(2) of the Act to deny the tax benefit of the additional income available to the second corporation for the small business deduction in section 125 of the Act.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
We trust these comments will be of assistance.
Yours truly,
for Director Business and General Division Specialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch