CRA expands on the distinction between recognized and incidental product sales re the 90% business income (a.k.a. business revenue) test for an excluded share

Under the split income proposals, dividends or gains from “excluded shares” are excluded from the tax on split income. Subpara. (a)(i) of the excluded share definition requires that less than 90% of the corporation’s "business income" be from the provision of services, and para. (c) requires that "all or substantially all of the income" of the corporation be not derived directly or indirectly from related businesses.

CRA has now provided to STEP Canada its official responses to the questions posed to it at the May 2018 STEP Roundtable. In its response to Q.5 on the above definition, CRA confirmed its previous oral response that references to “business income” and “income” are to gross income rather than net income.

It also expanded (as compared to its oral response) on its views on when it will regard product sales as “real” for purposes of the 90% business income test, stating:

Where a corporation has income from the provision of both services and non-services (including a service business that also involves a sale of property such as a business carried on by plumbers, mechanics or other contractors that sell replacement parts or building materials), the income from the provision of services and non-services should be computed separately and the non- service income should generally be taken into account in determining whether shares of a corporation are excluded shares of an individual unless such income can reasonably be considered to be necessary but incidental to the provision of the services (for instance as would be the case in an office cleaning service if it billed separately for the cleaning supplies used).

The distinction between the plumber who sells a replacement toilet and an office cleaning service that purports to charge separately for its cleaning supplies may indicate that CRA will ignore separate product charges when they are contrived.

Neal Armstrong. Summary of 29 May 2018 STEP Roundtable, Q.5 under s. 120.4(1) – excluded share.