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: Does rental income qualify for the SBD in 5 separate scenarios
Position: General comments provided
Reasons: General comments provided
XXXXXXXXXX
2011-040705
A. Townsend
February 14, 2012
Dear XXXXXXXXXX :
Re: Small Business Deduction (SBD)
This is in reply to your letter dated May 13, 2011 requesting clarification on whether a Canadian Controlled Private Corporation ("CCPC") is able to claim the SBD on rental income received in the following separate scenarios:
- A construction company owns a building with a parking lot and receives rental income for a portion of the parking lot that is rented to a neighbouring company.
- A used car dealership receives rental income from the rental of a portion of its previous location. The car dealership moved to a new location but continues to use a portion of the old location for storage and intends to sell it when the market value increases.
- A small manufacturing corporation that moves to a larger location and receives rental income from the building where it was located for over 20 years.
- A used car dealership owns two lots that are side by side. One lot has a trailer and the other a building with four units. The car dealership uses a portion of both lots and receives rental income from the remainder of the building and lot from sub-contractors.
- The sole shareholder of a holding company owns a property that it rents to the holding corporation, which in turn is rented to an operating company. The two corporations are associated.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Subsection 125(1) provides for the SBD which allows a CCPC to deduct from tax otherwise payable an amount equal to the SBD rate on the first $500,000 of income of the corporation for the year from an active business. Subsection 125(7) defines "income of the corporation for the year from an active business" to mean 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, other than income for the year from a source in Canada that is a property. Therefore, in order for rental income received from property to qualify for the SBD, the property must be incident to or pertain 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-73R6 - Small Business Deduction, ("IT-73R6"). 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.
Where a corporation has extra parking spaces and rents a portion of its parking lot to a neighbouring business, the rental income may qualify for the SBD since the parking lot is connected to and inseparable from the building where the corporation is carrying on an active business. However, where a business purchases or paves a larger parking lot than it requires with the intent of renting the additional space, the income would not qualify for the SBD. In this case, the rental income would be considered income from property that does not pertain to the active business.
In the situation where a car dealership moves to a new location and receives rental income from its old location, the rental income would not likely qualify for the SBD. Similarly, the rental income would not qualify for the SBD in the scenarios that you have described concerning a manufacturer receiving rental income from its old location and a car dealership receiving rental income from a portion of two lots and buildings. In all of these cases the corporations are receiving income from property that is not connected with the active business, the properties are not listed for sale and there is no indication that the rented property will be required by the active business in the future.
The last scenario you have described concerns a holding corporation receiving rental income from an associated corporation for the rental of a building. Subsection 129(6) deems investment income received from an associated corporation to be active business income where the amount is deductible in determining the associated company's income from an active business. Therefore, the investment income received by the holding corporation is deemed to be active business income and would qualify for the SBD.
Our comments above are based on the limited facts in your letter. Since a determination always involves a question of fact, whether a corporation qualifies for the SBD can only be made based on a complete review and the principal purpose of a corporation's business, which must be determined annually after all the facts relating to that business are considered.
I trust the foregoing is of assistance.
Yours truly,
Doug Watson
For Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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