Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether rental income received by a taxpayer can be considered active business income under the Act for purposes of the small business deduction ("SBD")?
Position: Question of fact.
Reasons: The law.
XXXXXXXXXX
2014-054004
Amanda Hachey
August 11, 2014
Dear XXXXXXXXXX:
Re: Small Business Deduction
We are writing in response to your letter of June 6, 2014, wherein you requested our views on whether a corporation that is a Canadian-controlled private corporation ("CCPC"), as that term is defined in subsection 125(7) of the Income Tax Act ("Act"), is able to claim the small business deduction ("SBD") on certain rental income it receives.
You indicated that the taxpayer carries on an incorporated professional XXXXXXXXXX services business. The taxpayer's corporation rents office space in a building to operate the XXXXXXXXXX services business. The building was chosen due to proximity to clients, heavy pedestrian traffic, and promoting visibility. Since the office space rented by the corporation is currently in excess of what is required for its professional XXXXXXXXXX services business, the excess office space is sub-leased to other tenants who provide complementary XXXXXXXXXX services. The corporation provides all supplies and equipment to the other tenants, as well as reception and billing services. The other tenants remain responsible for the collection of their own accounts receivable.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, "Advance Income Tax Rulings".
In general, subsection 125(1) of the Act allows a CCPC to deduct from tax otherwise payable an amount equal to the SBD rate on the first $500,000 of income it earns for the year from an active business.In order to fall into the definition of active business, the activity should first qualify as business. The word "business" is defined in 248(1) to include a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment.
Subsection 125(7) defines "active business carried on by a corporation" as meaning any business other than a "specified investment business" or a "personal services business" and includes "an adventure in the nature of trade". A "specified investment business", defined in subsection 125(7), generally means a business carried on by a particular corporation in a taxation year whose principal purpose is to derive income from property, such as rental income, unless the corporation meets one of two conditions:
- the particular corporation employs in the business throughout the taxation year more than 5 full-time employees; or
- another corporation associated with the particular corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the particular corporation in the year and it is reasonable to assume that the particular corporation would have required more than 5 full-time employees in its business if those services had not been provided.
Paragraph 125(7)(a) also provides that the term "income of the corporation for the year from an active business" means the total of the corporation's income for the year from an active business carried on by it, including any income for the year pertaining to or incident to that business. Therefore in order for rental income received to qualify for the SBD, the income must be pertaining to or incident to the active business.
The meaning of "incident to" or "pertain to" the active business of the corporation is discussed in paragraph 5 of IT Bulletin IT-73R6, "Small Business Deduction". Generally, "incident to" includes anything that is connected with or related to another thing, though not inseparable, or something that is dependent on or subordinate to another more important thing. "Pertains to" generally includes anything that forms part of, belongs to, or relates to another thing. The courts have found that, in interpreting the meaning of "pertains to" or "incident to", there has to be a financial relationship of dependence of some substance between the property in question and the active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation. It is a question of fact whether the rental activities are considered to be pertaining to or incident to the taxpayer's active business. If the rental activities are not considered to be pertaining to or incident to the professional XXXXXXXXXX services business, the rental income will be from a source that is property and will not qualify for the SBD.
As indicated in Interpretation Bulletin IT-206R "Separate Businesses", if a taxpayer's business operations are so interlaced, interdependent, and interconnected that it is virtually impossible to separate one operation from the other, then there is only one business being carried on. However, if the rental activities carried on by the corporation constitute a separate business, the resulting rental income would be income from a specified investment business as neither of the two exceptions discussed above appear to be met.
We trust that these comments will be of assistance.
Yours truly,
Katie Robinson, C.P.A., C.A.
Acting Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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