Mr. A wholly owned a personal real estate corporation (A Co) and a holding company (B Co) which, in turn, held 25% of the shares of a real estate brokerage (Realty Co), which otherwise was owned by unrelated persons. Realty Co received substantially all of the commissions generated by A Co and paid a portion thereof to A Co.
CRA noted that the condition in (a)(i)(A) of the specified corporate income (SCI) definition was satisfied because a shareholder of A Co (Mr. A) holds an indirect interest in Realty Co.
In order to exclude the application of (a)(i)(B), “all or substantially all” (i.e., generally 90% or more) of the income of the corporation (A Co) for the year from an active business should be from the provision of services or property to persons (other than the private corporation, i.e., Realty Co) with which the corporation deals at arm’s length. CRA indicated that this turned on the factual question of whether “A Co is receiving all or substantially all of its commission income from the provision of real estate services to clients with which it deals at arm’s length, and not Realty Co” i.e., was A Co providing its services to Realty Co or to arm’s length clients?
CRA indicated that if such condition was met, there would be no resulting carve-out from the active business income of A Co.