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: Claiming of SBD on certain payments between associated corporations.
Position: Issue was resolved with the release of new subsection 125(10) on October 19, 2016.
Reasons: See response.
Author: Robinson, Katie
Section: 125(1); 125(2); 125(3); 125(3.2); 125(7); 125(10), 129(6); 256(1)
2016 CTF Annual Conference
Question 15: The New Small Business Deduction Provisions
There appears to be an anomaly in these new provisions, perhaps best illustrated by an example.
Assume we have two corporations, Opco and Rentco. They are owned by the same person or group of persons, and as such are associated. Opco carries on an active business, and does not earn “specified partnership income” or “specified corporate income”. Rentco owns the real estate from which Opco operates, and earns net rental income of $150,000 from this activity. This income is deemed active business income by Subsection 129(6). The corporate group has under $10 million of taxable capital.
The Present Law
On an annual basis, Opco and Rentco file Schedule 23 to allocate 30% of their business limit to Rentco, and 70% to Opco. Rentco claims the small business deduction (SBD) on $150,000 of income, and Opco claims the SBD on $350,000 of its income.
The Proposed Law
Under the proposed changes, for fiscal years commencing after March 21, 2016, enabling Rentco to continue claiming the SBD on $150,000 per year will require the following steps:
a) Continuing to allocate 30% of the annual $500,000 business limit to Rentco, in accordance with subsection 125(3). This will leave Opco with a $350,000 business limit. This is unchanged.
b) Opco and Rentco must jointly elect an assignment of $150,000 of Opco’s SBD limit to Rentco, as these payments are “specified corporate income”. This assignment is required by subsection 125(3.2), and will be filed on a prescribed form yet to be released.
Pursuant to subsection 125(3.1), the amount assigned to Rentco will be subtracted from Opco’s business limit as computed in accordance with subsection 125(3).
In combination, then, it appears that Rentco may continue to claim SBD on $150,000, but that Opco will be restricted to $200,000 of income, as its business limit of $350,000 (determined in accordance with subsection 125(3)) will be reduced by $150,000 in accordance with subsection 125(3.1).
If 100% of the business limit is allocated to Opco under subsection 125(3), it would continue to have access to SBD on $350,000 of its income, but the assignment to Rentco would not result in Rentco having access to the SBD, as its business limit computed in accordance with Subsection 125(3) would be nil.
Can the CRA confirm that this is the manner in which they interpret the proposed legislation?
The anomaly described in this question was based on the previous version of the draft legislation, released on July 29, 2016, and the Department of Finance was made aware of it.
On October 21, 2016, the Department of Finance tabled revised legislation (The Notice of Ways and Means Motion), which included, inter alia, new subsection 125(10) of the Income Tax Act, which is intended to address the above-described anomaly. New subsection 125(10) provides a computational rule regarding certain amounts that a corporation receives from another corporation to which the corporation is associated and that may be eligible for the small business deduction under subsection 125(1).
Generally speaking, in the above situation, under new subsection 125(10), the $150,000 of income that Rentco receives from Opco would be excluded from the definition of specified corporate income (i.e., it will continue to be treated as active business income of Rentco pursuant to subsection 129(6)), provided the following conditions are met:
(a) The $150,000 is income from an active business of Rentco from the provision of services or property to another associated corporation (i.e., Opco); and
(b) The $150,000 was not deductible by Opco in respect of an amount included in Opco’s income that is:
(i) referred to in any of clauses 125(1)(a)(i)(A) to (C); or
(ii) reasonable to consider as being attributable to or derived from an amount referred to in clause 125(1)(a)(i)(C).
November 29, 2016
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