CRA considers that the specified corporate income carve-out may be avoided by earning active business income through rather than from a private corporation

A real estate broker carried on his practice through a wholly-owned corporation (A Co), which received all of its commissions, net of service charges, from a real estate brokerage firm (Realty Co). Realty Co was 25% owned by a holding company of the individual, and was otherwise owned by unrelated persons. Was such commission income of A Co excluded pursuant to s. 125(1)(a)(i)(B) from its active business income by virtue of being described in (a)(i)(A) of the “specified corporate income” (SCI) definition?

Given that (a)(i)(A) of the SCI definition was satisfied (the shareholder of A Co held an indirect interest in Realty Co.), this question turned on the application of (a)(i)(B) of that definition, which tested whether “all or substantially all” of the active business income of A Co for the year was from the provision of services or property to persons (other than the private corporation, i.e., Realty Co) with which it dealt at arm’s length. CRA indicated that this turned on the factual question of whether “A Co is receiving all or substantially all of its commission income from the provision of real estate services to clients with which it deals at arm’s length, and not Realty Co,” i.e., was A Co providing its services to Realty Co or to arm’s length clients?

This response perhaps implies that the SCI carve-out could be avoided with the appropriate structuring.

Neal Armstrong. Summary of 23 January 2025 External T.I. 2024-1030091E5 under s. 125(7) – SCI – (a)(i)(B).