Words and Phrases - "incident to"
30 September 2004 Internal T.I. 2004-0085051I7 F - Intérêts et indemnité additionnelle
A construction company sued a supplier for damages to its business suffered as a result of having been supplied the wrong product (including a reduction in its sales levels due to inability to obtain surety bonds) and was awarded damages plus interest and an additional indemnity pursuant to Articles 1618 and 1619 of the Civil Code of Quebec ("CCQ"). After finding that both amounts were interest, and before concluding that they were active business income, the Directorate stated:
[T]he phrase “that is incident to or pertains to” is not defined in the Act. Looking at the common dictionary meaning of those words, the phrase "is incident to" usually includes anything that is associated or connected with something else, albeit separately, or something that is dependent or subordinate to something else of greater importance. The phrase "pertains to" usually includes anything that is part of, belongs to, or is related to something else.
On the other hand, income from property that is employed or risked in a corporation's business operations is considered to be active business income. …
[T]he Court's judgment had the effect of crystallizing the amount receivable and making it payable to the Taxpayer retroactively from the date of the summons. It follows that the interest and additional indemnity which had accrued on this receivable replaced the income that would have been earned by the Taxpayer if it had invested the sums necessary for obtaining the surety bonds which were essential to the operation of its construction business or if it had used those sums for working capital.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) | indemnity under CCQ Art. 1619 was pre-judgment interest | 213 |
IT-73R6 "The Small Business Deduction" 26 March 2002
Reserve claimed against business income is business income when reversed
4. ... If the original gain on the sale of real property was categorized in a previous year as income from an active business, amounts included in income in subsequent years in respect of the realization of the mortgage reserve pursuant to subparagraph 12(1)(e)(ii), are considered to be income from an active business. This also applies to any mortgage interest received pertaining to such mortgage.
Meaning of "pertains to" or "incident to"
5. … 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.
Whether corporation’s profit is from property
8. If a corporation is incorporated to earn income by doing business, there is a general presumption that profits arising from its activities are derived from a business … . However, in some circumstances, a corporation's entire profits can be characterized as income from property, as might be the case where the corporation is formed for the sole purpose of holding shares of a second corporation or holding a property to be rented with limited landlord responsibilities. It is, of course, quite possible that a corporation will earn income from property as well as income from a business carried on, if such property income is not income from another separate business.