2014-0552451E5 Active business income

Principal Issues: Whether certain income received by a taxpayer can be considered active business income under the Act for purposes of the small business deduction (“SBD”)?

Position: Question of fact.

Reasons: The law.

Author: Hachey, Amanda
Section: 125(1); 125(7)

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                                                                                                                                                      2014-055245
                                                                                                                                                      Amanda Hachey

November 19, 2014

Dear XXXXXXXXXX:

Re:  “Active Business Income”

We are writing in response to your email of October 27, 2014, wherein you requested our views on whether certain rental income would be considered active business income for purposes of the Income Tax Act (the “Act”).

Briefly, as we understand your situation, the taxpayer is a corporation that is in the business of renting XXXXXXXXXX to its customers for XXXXXXXXXX.  You indicate that the taxpayer does not own the land on which the XXXXXXXXXX are placed.  The taxpayer leases the XXXXXXXXXX space to its customers.

You would like to know if the rental income received by the taxpayer would be considered income from an active business carried on by a corporation within the meaning of that phrase as defined in subsection 125(7).

Our comments

Written confirmation of the income tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R6 dated August 29, 2014, issued by the Canada Revenue Agency (CRA).  A fee is charged for this service.  Although we are unable to provide any comments with respect to the specific situation that you have described, otherwise than in the form of an advance income tax ruling, we will provide the following general comments.

Subsection 125(7) 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 expression “specified investment business”, which is defined in subsection 248(1) of the Act by referring to the definition of the same expression in subsection 125(7) of the Act, means a business carried on by a corporation “... (other than...a business of leasing property other than real property or immovable property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but...does not include a business...where:

(a) the corporation employs in the business throughout the year more than 5 full-time employees, or

(b) any other corporation associated with the corporation provides...managerial... or other similar services to the corporation...and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided”.

The term “immovable property” for the purposes of the above definition would require consideration of its ordinary meaning.  The determination as to whether a particular property is immovable property remains a question of fact which would require consideration of the degree or permanence of the annexation to the land (i.e., whether it has become a fixture or structure - refer to Interpretation Bulletin IT-79R3, “Capital Cost Allowance – Buildings or Other Structures”).

We trust these comments will be of assistance.

Yours truly

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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