Specified investment business
A specified investment business is, in the Income Tax Act, a business whose principal purpose is to derive income from property, including interest, dividends, rents and royalties. Its income is generally not active business income and is not eligible for the small business deduction, subject to exceptions.
Check the label if a company holds rental property or investments, or if a holding company sits in a structure being bought. The Income Tax Act defines the term in subsection 125(7). A credit union’s business and a business of leasing property other than real or immovable property are outside it. The CRA’s T2 guide states that income from a specified investment business is generally not considered active business income and is not eligible for the small business deduction.
The exceptions
The definition leaves out a business where the corporation employs more than a set number of full-time employees in it throughout the year, or where an associated corporation, in carrying on an active business, provides managerial, administrative, financial, maintenance or similar services and the corporation could reasonably be expected to require that staffing without them. These exceptions do not apply to a prescribed labour-sponsored venture capital corporation. The CRA’s guide treats income in those cases as active business income. Section 125(7) fixes the staffing threshold.
What to ask
- What is the principal purpose of each business the company carries on?
- How many full-time employees work in any rental or investment business?
- Does an associated corporation provide services to it?
- How did the accountant treat it on the T2 return?
The Act’s definition of an active business excludes a specified investment business, so the classification feeds other tests, such as a small business corporation. See also passive investment income and whether the small business deduction carries over when you buy a company.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentT2 Corporation Income Tax Guide — Chapter 4, Page 4 of the T2 return
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