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 real estate commissions earned by a personal real estate corporation ("PREC"), which are paid from a brokerage in which the shareholder of the PREC has an indirect interest in, would be described in subparagraph (a)(i) of the definition of specified corporate income in subsection 125(7) of the Act.
Position: Question of fact.
Reasons: If all or substantially all of the income is from the provision of services to arm’s length persons other than the private corporation (i.e., the brokerage), then the income received would not be an amount described in clause (a)(i)(B) of the definition “specified corporate income” in subsection 125(7) of the Act.
XXXXXXXXXX Income Tax Rulings Directorate
Ryan Wallace, CPA
2024-103009
January 23, 2025
Dear XXXXXXXXXX:
We are writing in response to your email on July 16, 2024, wherein you requested our views on whether commission income of a personal real estate corporation (“PREC”) received from a real estate brokerage would be considered specified corporate income (“SCI”), as that term is defined in subsection 125(7) of the Income Tax Act (the “Act”), and whether receiving this income would impact the PREC’s small business deduction (“SBD”).
You have provided the following example:
- An individual (Mr. A) owns 100% of a PREC (A Co), and 100% of another private corporation (B Co).
- B Co owns 25% of a corporation carrying on the business of a real estate brokerage (Realty Co). The remaining 75% of Realty Co is owned by unrelated parties.
- A Co and B Co are associated corporations by virtue of paragraph 256(1)(b) of the Act.
- Realty Co is not associated with either A Co or B Co.
- Both A Co and Realty Co are Canadian-controlled private corporations (“CCPCs”) as that term is defined in subsection 125(7) of the Act.
- A Co earns commissions by providing real estate services to clients while working under the Realty Co brokerage.
- Realty Co collects the commission from customers for the real estate transactions and, after keeping an agreed upon percentage, remits the net amount of commissions received from the transaction to A Co.
- A Co derives all or substantially all of its income from the commissions it receives from Realty Co.
- A Co provides real estate services to end clients (that is, the buyers or sellers of real estate).
- A Co does not provide services to Realty Co (the brokerage). Realty Co, the brokerage, is administrative in nature. All of the paperwork relating to a real estate transaction runs through Realty Co.
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.
Generally, pursuant to the SBD rules in subsection 125(1) of the Act, a CCPC can reduce its tax otherwise payable on income from carrying on an active business in Canada by an amount equal to the SBD rate multiplied by the least of three amounts. The first of these amounts determines the portion of the corporation’s active business income for a taxation year that can be eligible for the SBD (paragraph 125(1)(a) of the Act). Clauses 125(1)(a)(i)(A) to (C) of the Act indicate the portions, if any, of a CCPC’s income from an active business that is not eligible for the SBD.
In particular, for purpose of SDB eligibility, clause 125(1)(a)(i)(B) of the Act carves out from active business income amounts described in subparagraph (a)(i) of the SCI definition in subsection 125(7). However, this carved out amount may be added back to the amount eligible for the SBD pursuant to subparagraph 125(1)(a)(ii.1), but only to the extent allowed by the definition of SCI.
A CCPC can have an amount described in subparagraph (a)(i) of the definition of SCI for a taxation year if the CCPC has income from an active business carried on in Canada by it from the provision of property or services to a private corporation (directly or indirectly, in any manner whatever) and if the conditions in clauses (a)(i)(A) and (B) of the SCI definition are met.
Clause (a)(i)(A) of the SCI definition
For clause (a)(i)(A) of the SCI definition to be met, at any time during the year, A Co, or one of its shareholders, (Mr. A), or a person who does not deal at arm’s length with A Co or Mr. A, must hold a direct or indirect interest in Realty Co.
From the information provided, in addition to owning 100% of the outstanding shares of A Co, Mr. A also owns 100% of the outstanding shares of B Co. B Co owns 25% of the outstanding shares of Realty Co, with the remaining 75% being owned by unrelated parties.
In this situation, the condition set out in clause (a)(i)(A) would be met because a shareholder of A Co (Mr. A) holds an indirect interest in Realty Co (through ownership of all the outstanding shares of B Co, which owns a 25% interest in Realty Co).
Clause (a)(i)(B) of the SCI Definition
The condition in clause (a)(i)(B) of the definition SCI is met where, inter alia, it is not the case that “all or substantially all” of the corporation's income for the year from an active business is from the provision of services or property to persons (other than the private corporation) with which the corporation deals at arm’s length. The phrase “all or substantially all” generally means 90% or more.
It is a question of fact whether A Co is providing services to the brokerage (in this case, Realty Co) in exchange for real estate commissions or whether A Co is providing the services to arm’s length clients.
Where the facts of the particular situation provide that A Co is receiving all or substantially all of its commission income from the provision of real estate services to clients with which it deal at arm’s length, and not Realty Co, then the condition in subclause (a)(i)(B)(I) would not be met. If clause (a)(i)(B) of the SCI definition is not met, the commission income paid from Realty Co to A Co would not be income described under subparagraph (a)(i) of the SCI definition and there would be no carve out from active business income due to clause 125(1)(a)(i)(B) of the Act.
We trust our comments will be of assistance.
Yours truly,
Pamela Burnley CPA, CA
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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