Use of partnerships to hold investment portfolios may reduce the s. 125(5.1) SBD grind
The quantum of the small business deduction (SBD) grind under s. 125(5.1) based on the adjusted aggregate investment income (AAII) for the associated group may be reduced or eliminated if the investment portfolio generating the AAII is held through a joint partnership rather than a joint investment company (Investco). For example if Mr. X owns 100% of Opco (generating active business income) and 51% of Investco (with his spouse holding the other 49%), then all of the AAII of Investco will have to be accounted for in computing the SBC grind to Opco.
However, if the investment portfolio instead is held in a partnership that is owned by a 51/49 basis by respective holding companies for Mr. and Ms. X, only 51% of the AAII of the partnership will be included in computing the SBD grind of the Opco of Mr. X.
Neal Armstrong. Summary of Stan Shadrin, Alex Ghani and Josh Harnett, “Corporate Partnership May Avoid the Paragraph 125(5.1)(b) Grind,” Tax for the Owner-Manager,” Vol. 20, No. 4, October 2020, p.4 under s. 125(5.1).