CRA rules that where CFAs hold commercial properties needed for their regulated active businesses through individual property subsidiaries of a Holdco proportionately owned by them, the property rents are s. 95(2)(a)(i) income

A group of regulated non-resident subsidiaries (the “Regional FAs”) of Canco have held commercial estate as part of and in support of their regulated active businesses. In order to diversify risk, it is proposed that: the existing real estate as well as further real estate acquisitions will be held in individual “Property Cos;” the holdings in all the Property Cos will (subject to exceptions) be held in a single holding company (“FA Holdco”); and the Regional FAs will (where permitted) hold pro rata portions of the shares of FA Holdco rather than direct interests in the Property Cos or in the underlying commercial real estate.

CRA ruled that the income of the Property Cos (to the extent of the percentage interest therein of the Regional FAs held directly or “via” FA Holdco) will be deemed active business income under s. 95(2)(a)(i). Although the ruling letter is laconic, this presumably is based on the proposition that the properties held through the Property Cos are directly related to the active business activities of the Regional FAs because they support the regulatory requirements for those businesses in some manner, and would have given rise to active business income in the hands of the Regional FAs if they instead had continued to be held directly.

Neal Armstrong. Summary of 2016 Ruling 2015-0604451R3 under s. 95(2)(a)(i).