Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: If a CCPC earns income by providing property management services by employing one of the shareholders for rental properties co-owned by its shareholders, is it ABI?
Position: Question of fact, but likely.
Reasons: In providing property management and landscaping services to a variety of clients, Landco would not be carrying on a SIB or PSB.
XXXXXXXXXX 2010-039167
Sam Kim
(905) 721-5199
June 9, 2011
Dear Sir:
Re: Active business income - property management and landscaping services
This letter is in response to your email on December 30, 2010, concerning a corporation's eligibility for the small business deduction ("SBD") under subsection 125(1) of the Income Tax Act (the "Act") in a situation where the corporation derives its income from rendering property management and landscaping services.
Our understanding of the situation is as follows:
(a) A and B are spouses and have co-ownership in several residential rental units that earn rental income.
(b) A and B are the sole shareholders of Landco, a Canadian-controlled private corporation that is in the business of providing landscaping services to a variety of clients.
(c) Landco will hire B. Landco will use B to provide property management services to A and B in respect of their rental units.
(d) Landco will offer its property management services to other property owners as well.
(e) Landco does not employ throughout the year more than five full-time employees.
It is your view that by providing landscaping services, Landco is carrying on an active business within the meaning of the expression "active business carried on by a corporation" as defined under subsection 125(7) of the Act and as a result, Landco would qualify for the SBD.
You asked whether Landco will continue to qualify for the SBD after the implementation of steps (c) and (d), after which Landco's business will involve the provision of property management and landscaping services.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Our comments regarding the SBD can be found in Interpretation Bulletin IT-73R6 - The small business deduction, which is available from the CRA website at www.cra-arc.gc.ca.
Regarding the claim of the SBD by any particular corporation, there are a number of conditions that must be satisfied. For example, the SBD may only be claimed by a "Canadian-controlled private corporation" in respect of "income of the corporation for the year from an active business" carried on by it in Canada. For the purposes of section 125, the expressions "Canadian-controlled private corporation," "income of the corporation for the year from an active business" and "active business carried on by a corporation" are defined in subsections 125(7) of the Act. Whether or not the conditions for claiming the SBD are met is a question of fact.
The expression "active business carried on by a corporation" means any business carried on by the corporation other than a specified investment business ("SIB") or a personal services business ("PSB") and includes an adventure in the nature of trade.
A SIB, defined in subsection 125(7) of the Act, generally means a business carried on by a particular corporation in a taxation year whose principal purpose is to derive income from property, such as rental income, unless the corporation meets one of two conditions:
(a) the particular corporation employs in the business throughout the taxation year more than 5 full-time employees; or
(b) another corporation associated with the particular corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the particular corporation in the year and it is reasonable to assume that the particular corporation would have required more than 5 full-time employees in its business if those services had not been provided.
PSB carried on by a corporation in a taxation year is defined in subsection 125(7) of the Act to mean a business of providing services where an individual who performs services on behalf of the corporation (referred to as an "incorporated employee"), or any person related to the incorporated employee is a specified shareholder of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation. However, if the corporation employs more than five full-time employees, or the amount paid to the corporation for the services is received from another corporation with which it was associated in the year, the corporation is not considered to be carrying on a PSB.
Based on the information supplied, it would appear that, in providing property management and landscaping services to a variety of clients, Landco would not be carrying on a SIB or PSB. The income from the provision of property management and landscaping services would generally be regarded as ABI and eligible for the SBD.
We trust that our comments will be of assistance.
Yours truly,
Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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