Under the SBD rules, a Canadian-controlled private corporation can deduct from its taxes an amount equal to the SBD rate on the first $500,000 of income of the corporation for the year from an active business. "Income of the corporation for the year from an active business" is defined as the total of the corporation's income for the year from an active business it carried on, including any income for the year "pertaining to" or "incident to" that business, other than income for the year from a source in Canada that is a property. Under these rules, rental income received from property must be incident to or pertain to the active business to qualify for the SBD.
The meaning of "incident to" or "pertain to" the active business of the corporation is discussed in Interpretation Bulletin IT-73R6, "Small Business Deduction". Generally, "incident to" includes anything that is connected with or related to another thing, though not inseparable, or something that is dependent on or subordinate to another more important thing. "Pertains to" generally includes anything that forms part of, belongs to or relates to another thing. The courts have found that, in interpreting the meaning of "pertains to" or "incident to", 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.
Facts - A construction company owns a building with a parking lot and receives rental income for a portion of the parking lot that is rented to a neighbouring company.
CRA comments - In the TI, the CRA says that where a corporation has extra parking spaces and rents a portion of its parking lot to a neighbouring business, the rental income may qualify for the SBD since the parking lot is connected to and inseparable from the building where the corporation is carrying on an active business. However, where a business purchases or paves a larger parking lot than it requires with the intent of renting the additional space, the income would not qualify for the SBD. In this case, the rental income would be considered income from property that does not pertain to the active business.
Scenario 2 facts - A used car dealership receives rental income from the rental of a portion of its previous location. The car dealership moved to a new location but continues to use a portion of the old location for storage and intends to sell it when the market value increases.
Scenario 3 facts - A small manufacturing corporation moves to a larger location and receives rental income from the building where it was located for over 20 years.
Scenario 4 facts - A used car dealership owns two adjacent lots. One lot has a trailer and the other a building with four units. The car dealership uses a portion of both lots and receives rental income from the remainder of the building and lot from sub-contractors.
CRA comments - The CRA notes that the corporations in all of these cases would likely not qualify for the SBD because:
- They receive income from property that is not connected with the active business
- The properties are not listed for sale
- There is no indication that the rented property will be required by the active business in the future.
Facts - The sole shareholder of a holding company (Holdco) owns a property that it rents to Holdco, which in turn is rented to an operating company (Opco). Holdco and Opco are associated.
CRA comments - The CRA says that, in the case of a holding corporation that receives rental income from an associated corporation for the rental of a building, the investment income is deemed to be active business income and would qualify for the SBD. This is because investment income received from an associated corporation is deemed to be active business income where the amount is deductible in determining the associated company's income, under subsection 129(6).
For more information, contact your KPMG adviser.