3 September 2025 External T.I. 2024-1007671E5 - Active business

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 a taxpayer’s forestry activities, consisting of forest management, stumpage or log sales, and sale of carbon credits, qualify as an active business?

Position: Question of fact.

Reasons: Income from an active business does not include income from a specified investment business (“SIB”). Generally, if the principal purpose of the business is to derive income from property, the business could be considered a SIB. Whether income received from stumpage sales and the sale of carbon offset credits is income from property is a question of fact.

XXXXXXXXXX									2024-100767
R. Jacques-Mignault

September 3, 2025

Dear XXXXXXXXXX:

Re: Interpretation of Active Business

We are writing in response to your email of February 13, 2024, wherein you requested our views on whether a particular corporation (the “Taxpayer”) is carrying on an active business within the meaning of that term in XXXXXXXXXX which refers to the terms specified investment business (“SIB”) and personal services business as are defined in subsection 125(7) of the Income Tax Act (the “Act”).

The memorandum that you submitted to us (the “Memorandum”) indicates that the Taxpayer has one employee. The Taxpayer’s business consists of the following activities: forest management, stumpage (also occasionally referred to as log sales in the Memorandum), the sale of carbon offset credits, and eco-tourism attractions (recreation). However, since there does not appear to be any revenue related to eco-tourism attractions and no mention of such activities in the Memorandum we have assumed that the eco-tourism is inactive.

Furthermore, while there is also no direct revenue from the Taxpayer’s forest management activities, the Memorandum indicates that forest management is necessary to generate income from both the stumpage and carbon offset credits.

We understand that the carbon offset credits are earned under the terms of a sale agreement with a XXXXXXXXXX company (the “Purchaser”), whereby the Taxpayer has agreed to defer the harvest of a certain amount of harvestable timber on forested land it controls in order to remove greenhouse gases from the atmosphere. The Purchaser pays the Taxpayer for retaining the timber, and also purchases from the Taxpayer the rights to make environmental claims related to the deferred harvest.

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.

XXXXXXXXXX

The definition of active business in the XXXXXXXXXX aligns closely to the definition of active business in subsection 248(1) of the Act, with a notable difference being that the Act requires the business to be carried on by a Canadian resident, while the XXXXXXXXXX requires the business to be carried on in Canada. In addition, unlike the definition in the Act, the definition in the XXXXXXXXXX excludes a SIB from being an active business irrespective of the number of people that it directly or indirectly employs. Apart from these differences, the Canada Revenue Agency’s comments on the meaning of “active business” for purposes of the Act may generally be helpful when interpreting the definition in the XXXXXXXXXX.

The reference in the active business definition to a personal services business does not appear to be relevant in the present situation so the following discussion will focus on the question of whether the Taxpayer is carrying on a SIB.

It is the Canada Revenue Agency’s long-standing position that the existence of a business is a question of fact. In determining whether income is derived from a business, the Supreme Court of Canada in Canadian Marconi (footnote 1) indicated that there is a rebuttable presumption that a corporation earns business income. While a business must generally exist in order for a taxpayer to earn business income, a taxpayer may also derive property income from their business.

A SIB, as defined in subsection 125(7) of the Act, generally means a business carried on by a corporation (other than a business carried on by a credit union or a business of leasing property other than real or immovable property) in a taxation year, the principal purpose of which is to derive income from property (including interest, dividends, rents and royalties) unless certain exceptions apply which generally relate to the number of people that the taxpayer directly or indirectly employs. As noted earlier, for purposes of the definition of active business in the XXXXXXXXXX, these exceptions do not appear to apply, therefore, the determination of whether the Taxpayer is carrying on a SIB will rely on whether the principal purpose or the main or chief objective of the business carried on by the corporation is to earn income from property.

The Federal Court of Appeal (“FCA”) indicated in Weaver et al v The Queen (footnote 2) (“Weaver”) that in determining whether a business is a SIB and, in particular, whether the principal purpose of the business is to derive income from property, one should not look at the degree of activity that is required to operate that business, but rather the legal characterization of the income that the business was intended to principally earn.

In a later decision of the Tax Court of Canada (“TCC”) in 0742443 BC Ltd v The Queen, (footnote 3) upheld by the FCA, (footnote 4) the court found that the taxpayer’s mini storage business was a SIB. Based on Weaver, the legal character of the taxpayer’s income was reviewed and it was determined that the principal purpose of the taxpayer’s business was to derive income from property (rental income). When considering whether additional services provided by the taxpayer could change the legal character of the taxpayer’s income to something other than rent, the TCC stated that “[t]here is a tipping point where the provision of services overcomes the provision of property.” However, in the taxpayer’s circumstances, the additional services provided were found to be either part of the property or requisite support for earning property income (such as heating, security, and snow removal) or insufficient to change the character of its income to something other than rent.

Additionally, in Rocco Gagliese Productions Inc. v The Queen, (footnote 5) the TCC held that when determining the principal purpose of a business carried on by a taxpayer, it is important to consider what the taxpayer in fact does and what its sources of income are. In this case, the taxpayer earned royalties from copyrighted music. The court determined that the principal activity of the taxpayer was the originating and recording of music for specific television episodes and that this was its primary source of revenue. As a result, the principal purpose of the taxpayer was not to earn property income from its assets but rather to earn income from the daily writing and recording activities of its employee.

Having regard to the foregoing, where the facts show that the legal character of the income earned by a corporation is income from property, the corporation could be carrying on a SIB provided the corporation’s principal purpose is to derive this income (and provided that the statutory exceptions in the SIB definition do not apply). With that said, additional considerations may be necessary depending on the facts of the particular situation being reviewed. For instance, consideration of what the corporation’s activities actually are, as well as the source of income that they generate, may be necessary to establish the characterization of the income that the business is intended to principally earn. It is also possible that the provision of services needs to be taken into account to determine whether they overcome the provision of property thereby changing the legal character of income to something other than property.

These determinations require an examination of the taxpayer's whole course of conduct viewed in the light of the surrounding circumstances. It should also be noted that the principal purpose of a corporation must be determined annually after all the facts relating to the business (or businesses) carried on by that corporation in the year have been considered and analyzed.

As indicated above, the Memorandum states that forest management was a necessary activity to generate the Taxpayer’s income from stumpage and the sale of carbon offset credits. It is our understanding that forest management usually involves the development of a forest management plan that describes the composition of the relevant woodlot and provides for managing the growth, health, quality and make-up of the woodlot. Forest management also includes harvesting and other activities carried out to achieve the stated objectives of a forest management plan such as site preparation, planting, thinning, fertilizing, and other silvicultural activities. Generally, we would not consider the principal purpose of a business engaged in such forest management activities to be to earn income from property. However, in the present circumstances, it is unclear whether the forest management undertaken by the Taxpayer fits into the above description.

Our understanding of the term stumpage is that it generally refers to the amount that a third party pays to a landowner for the right to harvest timber from their land. Depending on the facts of the situation, stumpage income could be from a source that is property or business (or in some circumstances, such as for non-commercial woodlots, on account of capital). An example in which stumpage income might be considered to be from a source that is other than property is if it was in accordance with a forest management plan as a means of thinning the forest, clearing damaged trees, managing the composition of the forest, etc.

The details of the arrangement that you described concerning the sale of carbon offset credits by the Taxpayer are unclear as to whether the arrangement simply requires the Taxpayer to refrain from cutting down trees or whether there are other activities involved and moreover, if it could be part of or incidental to the Taxpayer’s other business activities.

In view of the above, and based on the limited facts provided, we are unable to determine the legal character or source of income earned by the Taxpayer in order to conclude on the principal purpose of the Taxpayer’s business.

However, if the legal character of the income that the Taxpayer earns is not property income, or if the actions of the Taxpayer support that it is not earning income from property, the principal purpose of the business carried on by the Taxpayer may not be to derive income from property. Accordingly, it would not be considered to carry on a SIB, and the Taxpayer could be considered to carry on an active business.

We trust our comments will be of assistance.

Yours truly,

Sarah Springate
for Division Director
Business and Employment division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Canadian Marconi, [1986] 2 CTC 465 (S.C.C.)

2 Weaver et al v The Queen, 2008 FCA 238

3 0742443 BC Ltd v The Queen, 2014 TCC 301

4 0742443 BC Ltd v The Queen, 2015 FCA 231

5 Rocco Gagliese Productions Inc. v The Queen, 2018 TCC 136