ABC Inc. is a Canadian-controlled private company that operates a manufacturing business. It owns a building, 65% of which is used for its manufacturing business, and the remaining 35% is leased to a third party. This excess space could be used in the future in the manufacturing business if ABC Inc. were to need additional space – or, alternatively, the latter space might be leased to third parties for use as residential housing, so that such conversion to manufacturing use is not anticipated. Is the rental income excluded from “income” from property under the definition of “income” in s. 129(4)?
Regarding subpara. (b)(i) of the definition, after quoting from IT-73R6, para. 5 as to the meaning of "pertains to" or "incident to," CRA stated:
Rental income may constitute incidental income of a business if, for example, the excess space was rented on a temporary basis, i.e., with the intention of using that portion of the building for the very near future expansion of the business's activities, or because the rental is related to the business's activities. However, there is nothing in the facts submitted … to support such a conclusion.
CRA stated that, in determining whether, under subpara. (b)(ii) of the definition income is derived from property that is used or held principally for the purpose of gaining or producing income from an active business:
[T]here are arguments to support the contention that the building used 65% by ABC Inc. in its manufacturing activities could be a property used or held primarily to earn income from its manufacturing business for the purposes of subparagraph (b)(ii) … . In such case, the rental income of ABC Inc. would qualify as "income of the corporation for the year from an active business" within the meaning of subsection 125(7).