2020-0856421E5 Adjusted AII and Deemed ABI

Principal Issues: Whether rental income that is deemed ABI by virtue of subsection 129(6) of the Income Tax Act (the “Act”) will be included in the computation of a taxpayer's Adjusted Aggregate Investment Income as defined in subsection 125(7) of the Act.

Position: No.

Reasons: The legislation.

Author: Foggia, Christina
Section: 125(5.1) (b), 125(7), 129(4), 129(6)

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                                                                                     2020-085642
                                                                                     Christina Foggia, CPA, CA

October 11, 2022

Dear XXXXXXXXXX:

Re: Adjusted Aggregate Investment Income and Deemed Active Business Income

This is in reply to your email dated July 15, 2020 (the “Request”), wherein you requested our views on whether rental income that is deemed to be active business income (“Deemed ABI”) by virtue of subsection 129(6) of the Income Tax Act, will be included in the computation of a taxpayer’s adjusted aggregate investment income (“AAII”) as is defined in subsection 125(7) of the Income Tax Act.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (“Act”).

You summarize a situation as follows:

1. Opco (“Payer”) and Propco (“Recipient”) are Canadian-controlled private corporations (“CCPCs”) as is defined in subsection 125(7).

2. Payer and Recipient are associated (within the meaning of subsection 256(1)) in the particular tax year.

3. Payer operates an active business in the particular tax year and Recipient owns the real property that is used in Payer’s active business.

4. Payer pays fair market value rent for the use of Recipient’s real property.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

A corporation’s “income” or “loss” for a taxation year from a source that is property is defined in subsection 129(4), and is said to include, under paragraph (a), the income or loss from a specified investment business carried on by it in Canada, other than income or loss from a source outside Canada, but does not include, under paragraph (b), the income or loss from any property that is incident to or pertains to an active business carried on by it, or that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.

Subparagraph 129(6)(a)(i) provides, that in computing the recipient corporation’s income for the year from a source in Canada that is a property for the purposes of subsection 129(4), such income will not include any portion (the “deductible portion”) of an amount that was or may be deductible in computing the income of an associated corporation for any taxation year from an active business carried on by it in Canada. In other words, in determining Recipient’s “income from a source that is property,” subparagraph 129(6)(a)(i) excludes any amount that Payer deducted in computing its active business income.

Additionally, subparagraph 129(6)(b)(i) provides that, for the purposes of section 125 and subsection 129(6), the deductible portion will be deemed to be income of the recipient corporation for the particular year from an active business carried on by it in Canada. Expressly, subsection 129(6) deems the property income of a corporation to be income from an active business where it was received from an associated corporation and resulted in a deduction in computing the associated corporation’s income from an active business (Deemed ABI).

The definition of aggregate investment income (“AII”), in subsection 129(4), generally includes only two categories of income; the eligible portion of a corporation’s net taxable capital gains and the corporation’s net income for the year from a source that is property, subject to certain exclusions. Since it has been determined that Deemed ABI under subsection 129(6) is not considered “income from a source that is property”, it follows that it will not fit within the definition of AII. Income that is of a nature described in your example (i.e., Deemed ABI) does not appear to fall into either of these two categories of income and therefore, in our view, should not be included in Recipient’s AII.

A corporations AII is relevant for the purposes of, among others, the small business deduction. A corporation's entitlement to the small business deduction for a particular taxation year is determined by reference, among other things, to the business limit of the corporation for the particular taxation year that is otherwise determined under section 125. Under subsection 125(5.1), the corporation’s business limit is determined as the greater of the reduction under the taxable capital reduction contained in paragraph 125(5.1)(a) and the AAII reduction contained in paragraph 125(5.1)(b). The AAII reduction reduces a corporation’s business limit for a taxation year (as otherwise determined) by five dollars for every dollar by which the corporation’s AAII (as is defined in subsection 125(7)), and that of its associated corporations, for taxation years ending in the preceding calendar year exceeds $50,000.

AAII is a modified version of the AII definition in subsection 129(4). Therefore, once a CCPC’s AII is known, it can then determine its AAII by making certain adjustments as are prescribed in paragraphs (a) to (d) of the definition of AAII in subsection 125(7) (“Prescribed Adjustments”).

Since Deemed ABI under subsection 129(6) is not included in the computation of a taxpayer’s AII, it follows that it will only be included in AAII if it is contained within one of the Prescribed Adjustments mentioned in the definition of AAII under subsection 125(7). As none of the Prescribed Adjustments deal with Deemed ABI, it is our view that property income that is Deemed ABI by virtue of subsection 129(6) will not be included in the computation of Recipient’s AAII. More specifically, paragraph (c) of the definition of AAII in subsection 125(7) deals with adjustments to the definition of "income" or "loss" as defined in subsection 129(4) and does not provide for any adjustment related to the Deemed ABI which is defined under paragraph 129(6)(b). As a result, it will not be relevant in determining the business limit reduction under paragraph 125(5.1)(b).

Accordingly, in the situation that you have described, it is our view that rental income received by Recipient, which would otherwise be property income, but is Deemed ABI under subsection 129(6), will not be characterized as “income from a source that is property” and will therefore not be included in Recipient’s AII or AAII.

We trust our comments will be of assistance.

Yours truly,

Pam Burnley, CPA, CA
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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