Cases
Scandia Plate Ltd. v. The Queen, 83 DTC 5009, [1982] CTC 431 (FCTD)
Ownership of the shares of an alleged Canadian-controlled private corporation was not acquired by a Canadian resident from a Swedish company before the date of closing of the written agreement of purchase and sale, rather than on the earlier effective date of that agreement when an alleged oral executory agreement was in place. Accordingly, the requirement that the company have been a Canadian-controlled private corporation "throughout the year" was not met. Cattanach J. stated (at p. 5012): "[W]hen there is a preliminary contract in words which is afterwards reduced into writing, or where there is an executory contract to be carried out by a deed afterwards executed, the rights of the parties are covered in the first case entirely by the writing, and in the second case entirely by the deed." In addition, any evidence that the Swedish company held its shares as a trustee for the Canadian resident until the time of execution would not assist the taxpayer, because the test of control rests on registered ownership, not beneficial ownership, of the shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Effective Date | 100 | |
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation | 28 |
Administrative Policy
31 January 2018 External T.I. 2016-0676431E5 - foreign tax credit on employees profit sharing
Are foreign taxes allocated from an employees profit sharing plan to an individual on a T4PS limited to 15% for foreign tax credit purposes? CRA responded:
Due to the expression “except such portion that is deductible by the EPSP under subsection 20(11) of the Act … as it appears in paragraph 144(8.1)(b) … an employee beneficiary of an EPSP is, effectively, restricted to a foreign tax credit of no more than 15% of the foreign non-business income (other than income from real or immovable property) allocated to them by the EPSP.
…As noted on form T2209, it is CRA’s current position that if the total foreign NBIT paid (and in the case of an employee beneficiary of an EPSP, deemed paid) to all foreign countries is not more than $200, an individual need not do a separate calculation for each country in order to claim a foreign tax credit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 144 - Subsection 144(8.1) - Paragraph 144(8.1)(b) | 15% limitation on FTC credit | 93 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) | no s. 20(11) deduction for foreign taxes respecting EPSP income allocated to beneficiary | 107 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) | no s. 20(12) deduction to EPSP beneficiary | 108 |
13 June 2017 STEP Roundtable Q. 8, 2017-0693381C6 - Single-member disregarded U.S. LLC
A single-member disregarded U.S. limited liability company (“SMLLC”), whose member is a resident of Canada, is factually resident in Canada and, thus subject to Part I tax, whereas U.S. source income (e.g., business income form a U.S. permanent establishment) would also be subject to U.S. income tax in the hands of the member, without the SMLLC being entitled to claim any foreign tax credit for such U.S. tax paid by its member.
In this regard, CRA indicated that s. 126 does not allow for the US income tax paid by the member to be credited against the Canadian income tax payable by the SMLLC itself. However, relief from double-taxation may be available to the member in the form of a deduction under s. 20(12) of the Act or, to the extent that the U.S. income tax paid by the member is not deducted under s. 20(12), and the member has income from a source in the US, that that member could claim a foreign tax credit against their own Canadian income tax otherwise payable.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Income Tax Conventions - Article 26 | no relief under Art. 26(1) of US Treaty re LLC with U.S.-source income and single Canadian-resident member | 145 |
| Tax Topics - Treaties - Income Tax Conventions - Article 29 | single member LLC with dual resident member could elect to be C-Corp and S-Corp, and then consider applying for relief under Art. 29(5) | 158 |
20 June 2016 External T.I. 2016-0648481E5 F - Small business deduction and GRIP
CRA accepted that a corporation may choose not to take the small business deduction so as to increase its general rate income pool account, thereby increasing the amount that may be distributed as eligible dividends.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Adjusted Taxable Income | CCPCs can choose to forego the small business deduction so as to maximize their GRIP | 118 |
26 March 2012 External T.I. 2012-0440441E5 F - Déduction accordée aux petites entreprises
General and superficial response to question as to when the small business deduction is available.
3 March 2011 External T.I. 2010-0380751E5 F - Déduction accordée aux petites entreprises
A corporation, that carries manages a convenience store under a franchise agreement, is not responsible for rent, inventory purchases and electricity costs, and receive a bi-weekly sales commission out of which it pays its employees and covers any shortfalls. Is it eligible for the small business deduction? CRA provided a generic discussion and referred to IT-73R6 and IT-458R2.
92 C.R. - Q.50
A corporation that is a trader in securities is entitled to the small business deduction.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Income of the Corporation for the Year From an Active Business | 24 |
85 C.R. - Q.56
Where a firm performs engineering activities in respect of a project both at its office in Canada and the foreign project site, only income derived from those engineering services that are rendered in Canada will qualify for the deduction.
IT-73R6 "The Small Business Deduction" 26 March 2002
5 ...In examining the ordinary dictionary meaning of these words, "incident to" generally includes anything that is connected with or related to another thing, though not inseparably, 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" in context, 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. In addition, the operations of the business have to have some reliance on the property such that the property is a back-up asset that could support the business operations either on a regular basis or from time to time.
Articles
Perry Truster, "Expanding into the U.S", Tax for The Owner-Manager, Vol. 2, No. 1, January 2002
Ancillary business activities in the U.S., although not carried on through a permanent establishment there, will not give rise to income eligible for the Canadian small business deduction.
Durnford, "The Distinction Between Income from Business and Income from Property, and the Concept of Carrying on Business", 1991 Canadian Tax Journal, p. 1131.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 129 - Subsection 129(4) - Canadian Investment Income | 0 |
Paragraph 125(1)(a)
Subparagraph 125(1)(a)(i)
Clause 125(1)(a)(i)(B)
Administrative Policy
26 January 2023 External T.I. 2021-0887661E5 - Small Business Deduction - Related
CRA indicated that where two CCPCs, wholly-owned by Mr. or Mrs. X, did not provide services or property, directly or indirectly, in any manner whatever, to the other, then on that basis neither CCPC would be considered to have earned income described in s. (a)(i) of the definition of “specified corporate income” in s. 125(7), i.e., s. 125(1)(a)(i)(B) would not carve out any such income from that income eligible for the small business deduction.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Corporate Income - Paragraph (a) - Subparagraph (a)(i) | 2 related but not associated CCPCs do not have their SBD ground under s. 125(1)(a)(i)(B) if they have no business dealings with each other | 139 |
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(5.1) - Paragraph 125(5.1)(a) | non-associated but related corporations not required to aggregate their taxable capital | 89 |
23 February 2021 External T.I. 2018-0769891E5 F - 125(7) "revenu de société déterminé"
The definition "specified corporate income" is used in the rule indicating that the portion of the income of a Canadian-controlled private corporation (say, Opco B) from an active business from the provision of services or property to a private corporation is not eligible for the small business deduction (SBD) if Opco B or one of its shareholders (or a person who does not deal at arm's length with the corporation or one of its shareholders) holds a direct or indirect interest in the private corporation, except to the extent that the private corporation assigns a portion of its own business limit to Opco B. However, s. (a)(i)(B)(I) of that definition indicates that such income is excluded from being specified corporate income for such SBD purposes if “it is not the case that all or substantially all of [Opco B]’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 [Opco B] deals at arm's length.” Thus, services income from “the private corporation” does not count towards being good income for purposes of this substantially-all test even if the private corporation deals at arm’s length with Opco B.
What if Opco B derives all of its active business income from the provision of services to arm’s length third parties, except that it derives 20% of its services income from two private corporations with the degree of connectedness described above: 15% from Opco D, with which it deals at arm’s length; and 5% from Opco C with which it does not deal at arm’s length?
CRA indicated that the above exclusion for services income from “the private corporation” should be interpreted under s. 33(2) of the Interpretation Act (references to the singular included the plural) as applying to the services income from both private corporations (Opco D and C). CRA indicated that since “this means that at most only 80% of Opco B's income is derived from the supply of property or services to persons (other than the private corporations Opco C and Opco D) with which it deals at arm's length,” the safe harbour was not available, so that the income from both private corporations was bad income.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | presumption that two 50% shareholders act together to control the corporation | 147 |
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Corporate Income - Paragraph (a) - Subparagraph (a)(i) - Clause (a)(i)(B) - Subclause (a)(i)(B)(I) | services income from multiple private corporations referenced in s. (a)(i)(A) can be bad income for purposes of the substantially all test | 477 |
7 February 2018 External T.I. 2017-0706401E5 - Specified corporate income, streaming of expenses
Where a corporation earns income eligible for the “small business deduction” (SBD) and income that is ineligible due to the “specified corporate income” (SCI) provisions, can it allocate expenses to the activities generating the latter type of income in order to maximize the income eligible for the SBD. CRA responded:
[C]lause 125(1)(a)(i)(B) refers to the portion of a CCPC’s income that is described in subparagraph (a)(i) of the definition of SCI in subsection 125(7) for the year. … [T]he word “income” in this section refers to “net income”.
Accordingly, if expenses are disproportionately allocated when calculating the income described in subparagraph (a)(i) of the definition of SCI in subsection 125(7) for the year …[o]nly the expenses that are reasonable to consider to be attributable to the activities generating the income described in subparagraph (a)(i) of the definition of SCI should be considered.
The CRA summary stated:
Whether streaming expenses can be used to circumvent the SCI rules.Position: Likely not.
20 April 2017 External T.I. 2016-0679721E5 - The small business deduction
SellCo A and SellCo B sell all of their fishing catch to BuyCo (also a CCPC), although BuyCo purchases the majority of its fish from unrelated parties. K owns 65% of BuyCo, K’s brother owns 100% of SellCo A and K’s son owns 100% of SellCo B. CRA confirmed that under the new s. 125(1)(a)(i)(B) rule, the income of the SellCos will not be eligible for the small business deduction, except to the extent that Buyco assigns some of its business limit to them, given that their income is not substantially derived from sales to arm’s length persons or untainted partnerships.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Specified Corporate Income | sales of product to private corporation in which brother or father of the vendor shareholder has a controlling interest | 316 |