13. When Does Rental Income Qualify for the SBD?
TI2011-0407051E5 - 2012/02/14 - Business and Trusts Division of the Rulings Directorate
In this TI, the taxpayer attempts to obtain a better understanding of CRA's position on when rental income may be income from an active business for the purposes of the small business deduction ("SBD"). To gage their position, the taxpayer presented a number of fact scenarios for CRA to comment on.
The definition of "income of the corporation for the year from an active business" can be found in s.125(7). It would include income from an active business and any income "pertaining to" or "incident to" that active business. Neither the terms "pertaining to" nor "incident to" are defined by the Act. CRA provides their interpretation of the terms in IT-73R6 stating:
"In examining the ordinary dictionary meaning of these words, "incident to" generally includes anything that is connected with or related to another thing, though not inseparably, 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" in context, 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."
In assessing the fact scenarios, CRA concluded that the rental income from three of the fact scenarios did not qualify for the SBD. No details of their analysis were provided, but CRA concluded that for those fact scenarios, the corporations received income from property "that is not connected with the active business". In the fact scenario where a corporation had extra parking spaces and rented a portion of its parking lot to a neighbouring business, CRA concluded that the rental income may be active business income and qualify for the SBD, the reasoning being that "the parking lot is connected to and inseparable from the building where the corporation is carrying on an active business".
Although some insight is obtained from these conclusions, what may best be drawn from the conclusions is that taxpayers should not hope for a liberal interpretation or application by CRA of the terms "pertaining to" or "incident to".
It should be noted that CRA stated that the properties in the fact scenarios were "not listed for sale and there is no indication that the rented property will be required by the active business in the future". These are factors that, because of the temporary nature of the rentals, may hint at active business income.
In the remaining fact scenario, CRA concluded that the rental income was active business income. This conclusion was not reached on an analysis of whether the income was "pertaining to" or "incident to" an active business, but rather on the provisions of s.129(6), which deems investment income received from an associated corporation to be active business income where the amount is deductible in determining the associated company's income from an active business.