CRA indicates that the rental income from the smaller portion of a building not used in manufacturing could be assimilated to active business income

A CCPC (ABC Inc.) owns a building, 65% of which is used in its manufacturing business, and the remaining 35% is leased to a third party. Is the rental income excluded from income from property under the definition of “income” in s. 129(4)? Para. (b) of this definition assimilates to income from an active business, property income:

• that is incident to or pertains to that business (subpara. (b)(i)); or
• from property used or held principally for the purpose of gaining or producing income from that business (subpara. (b)(ii)).

Regarding subpara. (b)(i), CRA indicated that “rental income may constitute incidental income of a business if, for example, the excess space was rented on a temporary basis, i.e., with the intention of using that portion of the building for the very near future expansion of the business's activities, or because the rental is related to the business's activities,” but thought that the facts here did not fit that pattern.

CRA stated that, in determining whether, under subpara. (b)(ii), the rental income was derived from property that was used or held principally for the purpose of gaining or producing income from an active business:

[T]here are arguments to support the contention that the building used 65% by ABC Inc. in its manufacturing activities could be a property used or held primarily to earn income from its manufacturing business for the purposes of subparagraph (b)(ii) … . In such case, the rental income of ABC Inc. would qualify as "income of the corporation for the year from an active business" within the meaning of subsection 125(7).

Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.12 under s. 129(4) – “income.”