CRA indicates that services income from multiple investee private corporations can be bad income for purposes of the specified corporate income - s. (a)(i)(B) safe harbour

The definition "specified corporate income" is used in the rule indicating that the portion of the income of a Canadian-controlled private corporation (say, Opco B) from an active business from the provision of services or property to a private corporation is not eligible for the small business deduction (SBD) if Opco B or one of its shareholders (or a person who does not deal at arm's length with the corporation or one of its shareholders) holds a direct or indirect interest in the private corporation, except to the extent that the private corporation assigns a portion of its own business limit to Opco B. However, s. (a)(i)(B)(I) of that definition indicates that such income is excluded from being specified corporate income for such SBD purposes if “it is not the case that all or substantially all of [Opco B]’s income for the year from an active business is from the provision of services or property to … persons (other than the private corporation) with which [Opco B] deals at arm's length.” Thus, services income from “the private corporation” does not count towards being good income for purposes of this substantially-all test even if the private corporation deals at arm’s length with Opco B.

What if Opco B derives all of its active business income from the provision of services to arm’s length third parties, except that it derives 20% of its services income from two private corporations with the degree of connectedness described above: 15% from Opco D, with which it deals at arm’s length; and 5% from Opco C with which it does not deal at arm’s length?

CRA indicated that the above exclusion for services income from “the private corporation” should be interpreted under s. 33(2) of the Interpretation Act (references to the singular included the plural) as applying to the services income from both private corporations (Opco D and C). CRA indicated that since “this means that at most only 80% of Opco B's income is derived from the supply of property or services to persons (other than the private corporations Opco C and Opco D) with which it deals at arm's length,” the safe harbour was not available, so that the income from both private corporations was bad income.

Neal Armstrong. Summary of 23 February 2021 External T.I. 2018-0769891E5 F under s. 125(7) - specified corporate income - s. (a)(i)(B)(I).