Section 123.4

Subsection 123.4(1)

Full Rate Taxable Income

Administrative Policy

2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.1, 2016-0674221C6 F - General deduction from tax - 123.4

income on which the SBD was not claimed nonetheless is not eligible for the general rate deduction

A Québec Canadian-controlled private corporation that did not benefit from the applicable Québec small business deduction could benefit from not receiving the SBD at the federal level. Although the combined corporate tax rate would rise from 22.3% to 26.9%, a benefit from not accessing the federal SBD would result from the fact that all its active business income could be distributed as eligible dividends. Where a CCPC determines not to deduct the SBD to which it is entitled in computing its federal tax, will its general deduction from tax under s. 123.4(2) thereby increase? In responding negatively, CRA stated:

[A] CCPC may choose not to deduct an amount as a SBD, but the least of the amounts determined under paragraphs 125 (1) (a) to (c) would nevertheless reduce taxable income in the computation of its "full rate taxable income" used in the calculation of the GDT under subsection 123.4(2).

Paragraph (b)

Administrative Policy

2 June 2022 External T.I. 2019-0828381E5 - Tax Rate on Rental Income in Excess of SBD

a CCPC not entitled to the SBD and with more than 5 employees receives the regular corporate rate on its rental income

Opco, which is a CCPC that has exceeded the $15 million “taxable capital employed in Canada” threshold such that the small business deduction is unavailable, employs more than 5 full-time employees in its sole business (the “Business”), which is the rental in Canada of real property. CRA stated:

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 [aggregate investment income] AII and all of its taxable income is full rate taxable income subject to federal tax at rate of 15%.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(4) - Aggregate Investment Income rental income of CCPC from non-specified investment business rental property is not AII 132

7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 4, 2021-0895991C6 F - Déduction pour don de bienfaisance corporatif

no charitable deduction can reduce aggregate investment income

Where a corporation realizes both business income and a capital gain in the year in which it makes a gift, the mechanism for calculating the corporation's tax liability for that year under s. 123.4 results in the gift not reducing the tax payable on the taxable capital gain, which is taxed at a higher rate. Could CRA allow the donation deduction from the taxable capital gain realized on the sale of a business where the donation occurs in the same year as the sale and business income is also realized in the same year? After noting that the s. 123.4(2) deduction is determined by applying the general rate reduction percentage for the year to the corporation’s “full rate taxable income” for the year, CRA stated:

Where a corporation is a CCPC, full rate taxable income is determined under paragraph (b) of that definition … [and] is its taxable income subject to tax under subsection 123(1) reduced by, inter alia, its aggregate investment income as defined in subsection 129(4).

Aggregate investment income includes, inter alia, the eligible portion of taxable capital gains.

There is no provision … that allows a charitable deduction to be taken into account in computing a corporation's aggregate investment income