Question asked by Marjorie Trevor:
My corporation, a CCPC, has a catering business and holds a building as an asset. I rent a portion of the building but use the rest in my operations. Is my corporation now a Specified Investment Business?
Disclaimer: This is not tax advice. The answer below is for general purposes. Please exercise caution while making any decision based on this post or any other post on this website. This question may have been rephrased to correct some of the technical terms. The rephrased questions are often more helpful to a wider range of readers.
Incidental Rental Income is the Active Business of a Corporation
Active business income earned in a Canadian Controlled Private Corporation (CCPC), has preferential tax rates due to the operation of Small business deduction (SBD).
When a CCPC earns investment income or property income, that income is taxed at higher rates. If the corporation’s primary purpose is to generate income from property, the corporation is not a CCPC but a Specified Investment Business.
Subsection 129(4) defines Aggregate investment income, however, paragraph b excludes certain income from the property. If the income from property, i.e. rental income, is incidental to an active business, that income is not included in Aggregate investment income on schedule 7 of T2.
Going back to the original question, if renting part of the building made it a specified investment business income or not?
If the rental income in this situation is incidental to the catering business of the corporation, it is not an investment income. The corporation runs a catering business and used the building for its operations. During covid-19, a smaller portion, let’s say 25%, started generating rental income on a temporary basis. The primary business is still catering and still used 75% of the building. If this is the situation, this income can be safely recorded as Active business income.
Read: Rental income from associated corporations is Active business income in some situations.
While preparing your Corporate income tax return T2, for such a corporation, there is no need to fill Schedule 7.