2023-0962831E5 Active business income – Income from solar panels

Principal Issues: Whether income earned by a corporation from selling electricity generated from solar panels would be active business income eligible for the small business deduction pursuant to subsection 125(1) of the Income Tax Act.

Position: Question of fact.

Reasons: Income from an active business does not include income from a specified investment business (“SIB”). Generally, if the principal purpose of the business is to derive income from property, the business could be considered a SIB. Whether income received from selling electricity generated from solar panels is income from property is a question of fact.

Author: Wallace, Ryan
Section: 125(1), 125(7) “income of the corporation for the year from an active business”, “active business carried on by a corporation”, “personal services business”, “specified investment business”, 129(4) “income or loss”, 248(1) “business”, “property"

XXXXXXXXXX                                                     Income Tax Rulings Directorate
                                                                             Ryan Wallace, CPA
                                                                             2023-096283

March 5, 2024

Dear XXXXXXXXXX:

Re: Active Business Income – Income received from selling electricity generated from solar panels

We are writing in response to your email of February 3, 2023, wherein you requested our views on whether income earned by a Canadian-controlled private corporation (the “Corporation”) from selling electricity generated from solar panels would be considered active business income (“ABI”) eligible for the small business deduction (“SBD”) in subsection 125(1) of the Income Tax Act (“Act”).

You have indicated that the sole business activity of the Corporation would be to build a small utility-scale solar array on bare land and sell the electricity that is generated to a local utility service under the terms of a long-term contract. The Corporation would hire approximately 5 part-time employees to run the solar panel electricity generating business.

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. However, we can provide the following comments.

The CRA's general comments on the SBD can be found in Interpretation Bulletin, IT-73R6, The Small Business Deduction. In order for a corporation to be able to claim the SBD, there are a number of conditions that must be satisfied. Generally, the SBD may only be claimed by a corporation that was throughout the taxation year a “Canadian-controlled private corporation” in respect of “income of the corporation for the year from an active business” carried on by it in Canada, as those terms are defined in subsection 125(7) of the Act.

Subsection 125(7) of the Act also defines the term “active business carried on by a corporation” as meaning any business other than a “specified investment business” (“SIB”) or a “personal services business” and includes an adventure in the nature of trade. To be considered an active business, the activity should first qualify as a business. The word “business” is defined in subsection 248(1) to include a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment.

A SIB, as defined in subsection 125(7) of the Act, generally means a business carried on by a corporation (other than a business carried on by a credit union or a business of leasing property other than real or immovable property) in a taxation year the principal purpose of which is to derive income from property (including interest, dividends, rents and royalties) unless the corporation meets one of the following two conditions:

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

(b) another corporation associated with the particular corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the particular corporation in the year and it is reasonable to assume that the particular corporation would have required more than 5 full-time employees in its business if those services had not been provided.

In general, if the principal purpose or the main or chief objective of a business carried on by a corporation is to earn income from property, then that business would be a SIB unless one of the conditions mentioned in (a) or (b) above is met. If a business is a SIB, then the income from that business will not be active business income and therefore would not be eligible for the SBD. It should be noted that the "principal purpose" of a corporation must be determined annually after all the facts relating to the business (or businesses) carried on by that corporation in that year have been considered and analyzed.

The determination of whether income earned by a corporation from selling electricity that is generated from solar panels is active business income or income from property is one that must be resolved based on the facts of the particular case. While there is a general and rebuttable presumption that a corporation earns business income, a corporation's entire income can still be characterized as income from property. The SIB definition does not ask about the general nature of the business of a corporation, or the degree of activity or passivity actually required by that business. Rather, it asks about the legal character of the income that the business is intended principally to earn. Where the facts show that the legal character of the income earned by a corporation is income from property, then the corporation could be carrying on a SIB (provided that is the principal purpose of that business and the statutory exceptions in the SIB definition do not apply).

In our view, income from property would generally mean the production of revenue from the use of such property that generates income without active and extensive business-like intervention. In other words, income from property is derived from the mere ownership of such property without a significant commitment of time, labour or attention (such as income from interest, dividends, rents and royalties). On the other hand, income from a business requires organization, systematic effort, and a certain degree of activity.

If the course of conduct of the Corporation indicates that the income is produced with active and extensive business-like intervention, and the nature or legal character of the business transactions supports that, then the Corporation could be considered to derive income from a business rather than income from property. Consequently, where the principal purpose of the business carried on by the Corporation is not to derive income from property, any gains or losses from the business may be considered "income of the corporation for the year from an active business" as defined in subsection 125(7) of the Act. Accordingly, provided that all the other criteria are met, the Corporation could be entitled to the SBD.

We trust our comments will be of assistance.

Yours truly,

Sandro D'Angelo CPA, CMA
Acting Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2024

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2024