Active business income

Active business income is the income a corporation earns by running a business, as opposed to holding investments. The term matters in two places: whether income qualifies for the small business deduction, and whether a company’s assets are used principally in an active business, part of the Act’s test for a small business corporation that the qualified small business corporation share rules build on.

What the Act says

Section 125(7) defines an active business carried on by a corporation as any business other than a specified investment business or a personal services business. It also includes an adventure or concern in the nature of trade. The CRA’s T2 guide says income from either excluded kind is generally not active business income eligible for the deduction.

What to ask

• Does any part of the company’s income come from renting or investing rather than operating?
• Would the person performing the company’s services reasonably be regarded as an officer or employee of the customer, but for the company’s existence?
• Which accountant’s working papers show how the company classified its income?

See the cash-holding answer and QSBC shares.