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 income from a property that is “used or held principally for the purpose of gaining or producing income from an active business carried on by” a corporation is included in its income “for the year from an active business”.
Position: Yes.
Reasons: The legislation.
2024 CTF Annual Conference
CRA Round Table
Question 14: Availability of the Small Business Deduction
Corporation A is a Canadian controlled private corporation that carries on active business in Canada, and holds property in connection therewith.
Subparagraph 125(1)(a)(i) generally provides that, subject to various exceptions, a CCPC may deduct from the tax otherwise payable a percentage of the “income of the corporation for the year from an active business carried on in Canada”.
Paragraph (a) of the definition of “income of the corporation for the year from an active business” in subsection 125(7) states that that term includes 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, other than income for the year from a source in Canada that is a property (within the meaning assigned by subsection 129(4)).
Subparagraph (b)(ii) of the term “income” of a corporation for a taxation year from a source that is a property in subsection 129(4) excludes income from a property that is “used or held principally for the purpose of gaining or producing income from an active business carried on by it” (the Principal Purpose Exception). The existence of the Principal Purpose Exception presupposes that such income does not pertain to and is not incident to the business.
Question: Can the CRA confirm that income that falls within the Principal Purpose Exception will be “income of the corporation for the year from an active business”, notwithstanding that that term as defined in subsection 125(7) does not include the Principal Purpose Exception?
CRA Response
Section 125 of the Act provides the rules for the calculation of the small business deduction (“SBD”) available to a Canadian-controlled private corporation (“CCPC”) on its income from carrying on an active business in Canada. Using the SBD, a CCPC may reduce its tax otherwise payable on such income by an amount equal to the SBD rate multiplied by the least of three amounts. These amounts may be described in general terms as:
• active business income (paragraph 125(1)(a));
• taxable income (paragraph 125(1)(b)); and
• the business limit (paragraph 125(1)(c)).
The amount described in paragraph 125(1)(a) of the Act is, generally speaking, equal to the sum of the portion of the CCPC’s income from an active business carried on in Canada for a taxation year excluding certain income and exceeding certain losses.
Subsection 125(7) of the Act 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”.
The definition “income of the corporation for the year from an active business” in subsection 125(7) of the Act includes, by virtue of paragraph (a), 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, other than income for the year from a source in Canada that is a property (within the meaning assigned by subsection 129(4)).
Paragraph (b) of the definition “income” or “loss” of a corporation for a taxation year from a source that is a property in subsection 129(4) of the Act does not include 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.
Accordingly, Corporation A’s income for the year from an active business includes not only its income from its active business, but also any income from a source that is property that is incident to or pertains to that business or that is used or held principally for the purpose of gaining or producing income from that business.
Whether a property is used or held principally for the taxation year for the purpose of gaining or producing income from an active business is a question of fact. Factors to be considered in determining whether a property is used in an active business include the actual use to which the asset is put in the course of the business, the nature of the business involved and the practice in the particular industry.
As noted in paragraph 6 of IT-73R6, The Small Business Deduction, the issue of whether property was used or held by a corporation in the course of carrying on a business was considered by the Supreme Court of Canada in Ensite Limited v. Her Majesty the Queen [86 DTC 6521]. The court held that the holding or using of property must be linked to some definite obligation or liability of the business and that a business purpose test for the use of the property was not sufficient. The property had to be employed and risked in the business to fulfil a requirement which had to be met in order to do business. In this context, risk means more than a remote risk. If the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.
Therefore, where it is determined, based on the facts of a particular situation, that a property of Corporation A is used or held principally for the purpose of gaining or producing income from its active business, any income from that property would qualify as “income of the corporation for the year from an active business”, as defined in subsection 125(7) of the Act.
Matthew Ross
2024-103776
December 3, 2024
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