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: What is the tax rate applicable to a CCPC on rental income if the business is not a specified investment business.
Position: General rate.
Reasons: Income from a business that is not a SIB is active business income and is not aggregate investment income.
XXXXXXXXXX 2019-082838
Matthew Ross, CPA, CA
June 2, 2022
Dear XXXXXXXXXX:
Re: Tax rate applicable to rental income earned by a corporation
This is in reply to your email of October 25, 2019, in which you asked how income earned by a Canadian-controlled private corporation (“CCPC”) from residential rentals would be taxed. You presented the following scenario:
- Opco operates entirely in Canada and its only business is the rental of real property (“the Business”). All of Opco’s income is from the Business and all of Opco’s property is used principally in the Business.
- Opco is not associated with any other corporations (within the meaning of section 256 of the Income Tax Act (Canada)(“the Act”)) in the current or prior year.
- Opco’s “taxable capital employed in Canada,” within the meaning assigned by section 181.2 of the Act (“taxable capital”) is greater than $15 million in the current and prior year so that the corporation’s business limit is zero and the small business deduction (“SBD”) is not available.
- The Business is not a personal services business, as that term is defined in subsection 125(7) of the Act.
- The Business employs more than 5 full-time employees throughout its tax year and is, therefore, not a specified investment business as defined in subsection 125(7) of the Act.
Our comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
A corporation’s taxable income earned in Canada is subject to tax at a rate of 38% under subsection 123(1) of the Act. Taxable income earned by a corporation in the year in a province is then eligible for the federal tax abatement found in subsection 124(1), which results in a deduction of 10% from tax otherwise payable under Part I.
The general rate reduction in subsection 123.4(2) of the Act provides a further deduction (currently 13%) on “full rate taxable income for the year,” as defined in subsection 123.4(1), such that a corporation’s full rate taxable income is currently taxed at a federal rate of 15%. In broad terms, a corporation’s full rate taxable income for a taxation year is that amount of its taxable income that does not otherwise qualify for a lower tax rate or other favourable tax treatment.
Full rate taxable income is defined separately in section 123.4 of the Act for CCPCs and for other corporations. Generally speaking, for a CCPC that is neither a credit union nor a cooperative corporation, and where paragraph (c) of the definition does not apply, “full rate taxable income for the year” is that taxable income subject to the general rate under subsection 123(1) in excess of: amounts that have benefited from a deduction in respect of manufacturing and processing profits, income from a personal services business, the least of the amounts upon which the SBD could be claimed, and “aggregate investment income” (“AII”).
A corporation’s AII for a taxation year is defined in subsection 129(4) of the Act as the amount, if any, by which the total of all amounts specified in paragraphs (a) and (b) exceeds the total of all amounts, each of which is the corporation’s loss for the year from a source that is a property. Paragraph (a) of the definition generally includes the amount of taxable capital gains for the year that exceed the total of allowable capital losses for the year and the amount, if any, deducted under paragraph 111(1)(b). Paragraph (b) of the definition includes in AII a corporation’s income for the year from a source that is a property, with four exclusions, none of which are relevant in Opco’s situation.
A corporation’s “income” or “loss” for a taxation year from a source that is a property is also defined in subsection 129(4) of the Act. It includes,
- under paragraph (a), the income or loss from a specified investment business carried on by it in Canada other than income or loss from a source outside Canada,
but does not include,
- under paragraph (b), the income or loss from any property that is incident to or pertains to an active business carried on by it, or that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.
“Active business” is defined in subsection 248(1) of the Act to mean, in relation to any business carried on by a taxpayer resident in Canada, any business carried on by the taxpayer other than a specified investment business or a personal services business.
You have noted that Opco’s taxable capital is in excess of $15 million and, as a result, its business limit is zero. Since Opco is not entitled to claim the SBD, in determining its “full rate taxable income for the year,” no amount is deducted from Opco’s taxable income in respect of amounts eligible for the SBD.
As the Business has more than 5 full-time employees throughout its tax year, it is not a specified investment business and Opco’s income is from an active business. If all of Opco’s property is used for the purpose of gaining or producing income from the active business, no amount is deducted from Opco’s taxable income in respect of AII and all of its taxable income is full rate taxable income subject to federal tax at rate of 15%.
We trust our comments will be of assistance.
Yours truly,
Sandro D’Angelo, CPA, CMA
Acting Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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