Mr. A owned 50% of a real estate management company (Hco), which derived substantially all of its income from providing services to Wco, which invested in joint venture real estate development projects and which was wholly-owned by Mrs. A. Hco was 50% owned by an unrelated third party, and was not associated with Wco. Is Hco’s income earned from Wco “specified corporate income” (SCI) and, if so, how is Hco’s small business deduction (SBD) impacted?
CRA noted that, absent an election under s. 125(3.2), the total active business income (ABI) derived by Hco from Wco would be excluded under s. 125(1)(a)(i)(B) from its income eligible for the SBD given that both the conditions in s. (a)(i)(A) of the SCI definition were satisfied: Mrs. W, who had an interest in Wco, did not deal at arm’s length with a shareholder of Hco (Mr. A): s. (a)(i)(A); and it was not the case that substantially all of Hco’s active business income was from the provision of services or property to persons (other than Wco) with which Hco dealt at arm’s length. (s. (a)(i)(A)).
However, the ABI otherwise carved out under ss. (a)(i)(A) and (B) of the SCI definition could be restored under s. 125(1)(a)(ii.1) to the extent that Wco assigned all or a portion of its business limit to Hco under s. 125(3.2).