CRA notes that services income earned from an arm’s length CCPC could be ineligible for SBC purposes under the “specified corporate income” rules

CRA commented on an example of the reduction to the small business deduction that may arise under the “specified corporate income” (SCI) rules. Mr. A owned 50% of a real estate management company (Hco), which derived substantially all of its income from providing services to a corporation owned by Mrs. A with a real estate business. Hco was 50% owned by an unrelated third party, and was not associated with Wco.

CRA noted that, absent an election under s. 125(3.2), the total active business income (ABI) derived by Hco from Wco would be excluded under s. 125(1)(a)(i)(B) from its income eligible for the SBD, notwithstanding that Hco and Wco were described as dealing with each other at arm’s length. This was because (applying the two conditions in s. (a)(i)(A) of the SCI definition): Mrs. W, who had an interest in Wco, did not deal at arm’s length with a shareholder of Hco (Mr. A); and it was not the case that substantially all of Hco’s ABI was from the provision of services (or property) to persons (other than Wco) with which Hco dealt at arm’s length.

However, the ABI otherwise carved out under the SCI definition could be restored under s. 125(1)(a)(ii.1) to the extent that Wco assigned all or a portion of its business limit to Hco under s. 125(3.2).

Neal Armstrong. Summary of 20 October 2022 External T.I. 2020-0869681E5 under s. 125(7) - “specified corporate income” - s. (a)(i).