CRA provides illustration of the SBD-denial rule in s. 125(1)(a)(i)(B)

SellCo A and SellCo B sell all of their fishing catch to BuyCo, although BuyCo purchases the majority of its fish from unrelated parties. K owns 65% of BuyCo, K’s brother owns 100% of SellCo A and K’s son owns 100% of SellCo B. CRA confirmed that under the new s. 125(1)(a)(i)(B) rule, the income of the SellCos will not be eligible for the small business deduction, except to the extent that Buyco assigns some of its business limit to them, given that their income is not substantially derived from sales to arm’s length persons or untainted partnerships.

Neal Armstrong. Summary of 20 April 2017 External T.I. 2016-0679721E5 under s. 125(7) – specified corporate income.