If the conditions above are met, the specified corporate income of the particular corporation
that would be eligible for the SBD is the lesser of:
a) The active business income earned by the particular corporation from the direct or
indirect provision of services or property to the private corporation;
b) The portion of the $500,000 business limit assigned to the particular corporation by the
private corporation; and
c) An amount determined by the Minister of National Revenue to be reasonable in the
circumstances.
Using the latter of the two hypothetical scenarios described above, Trucking Corp. would be
caught under this rule, as it would be the “particular corporation” providing services to Warehouse
Corp., which is owned by the spouse of the shareholder of Trucking Corp.; in addition, Trucking
Corp. does not provide services to third parties. Effectively, the fees earned by Trucking Corp.
are producing taxable income that would not be eligible for the SBD unless Trucking Corp. was
assigned a portion of the $500,000 business limit by Warehouse Corp.
Alternative arrangements
The proposed rules related to SBD are very broad and to some extent undefined (i.e. direct or
indirect interest). However, there may still be opportunities for certain arrangements that are
not captured by the draft legislation. For example: joint ventures and cost-sharing arrangements.
Joint ventures
Neither “partnership” nor “joint venture” is defined under the Act; however, a partnership is
distinguished in the Act as it is considered a separate entity from its members. Income from a
partnership is calculated at the partnership level, even though that income is allocated and
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34 CPABC in Focus • Nov/Dec 2016
taxed in the hands of its members. By contrast, a joint venture is not considered a separate entity for tax purposes, and its income
is calculated and taxed via its members.
In theory, then, the proposed SBD rules
should not affect the income earned from a
joint venture, as it is not considered income
allocated from a partnership or income
earned from a private corporation. However,
the difference between a joint venture and a
partnership can be blurry, and taxpayers
must be careful not to call an arrangement a
joint venture when it is, in fact, acting as a
partnership.
Cost-sharing arrangements
A cost-sharing arrangement is an agreement
between participants to share common costs
incurred in the operation of business—costs
such as office rent, employee wages, and research and development expenses. Unlike a
partnership or a joint venture, a cost-sharing
arrangement has no element of profit to be
allocated to its members. Since participants
in such an arrangement do not carry on
business in common, they should have their
own revenue sources, and any revenue
earned would not be shared among the
participants. Therefore, the proposed SBD
rules would not apply to them.
Several small corporations may be able to
use a cost-sharing arrangement effectively.
Bigger corporations, however—especially
those operating across provinces—would
find this arrangement impossible.
Time will tell…
Looking at the proposed legislation, it’s clear
that the government intends for the new
rules to have the broadest application possible
to limit each economic group to a single
$500,000 “business limit.” Arguably, the
reach of the new rules could extend beyond
this purview, as the draft legislation does not
specify what percentage of ownership would
constitute a “direct or indirect interest” in a
corporation or partnership.
Effectively, entities that are completely
dealing at arm’s length may be forced to
share a single business limit under the new
regime. All attention is now focused on how
the proposed legislation might be amended
further before it becomes enacted.