Line 400 - Income from active business carried on in Canada

Line 400 - Income from active business carried on in Canada

Complete Schedule 7, Aggregate Investment Income and Income Eligible for the Small Business Deduction, to determine the following amounts:

• the aggregate investment income and foreign investment income for determining the refundable portion of Part I tax (see "Refundable portion of Part I tax, Lines 440, 445, and 450" on page 80 for details)

• the specified partnership income for members (or designated members) of a partnership

• the income from an active business carried on in Canada for the SBD

CCPCs may now assign all or part of their business limit under subsection 125(3.2) or specified partnership business limit under subsection 125(8) to another corporation.

Use Schedule 7 to assign all or part of your specified partnership business limit to another corporation.

Also file Schedule 7 if another corporation assigned all or part of its business limit to your CCPC or if a member of a partnership assigned all or part of the member's specified partnership business limit to your CCPC.

If you are assigning all or part of your business limit to another corporation, report it on page 4 of the T2 return.

Active business income

Generally, active business income is income earned from a business source, including any income incidental to the business.

Income from a specified investment business or from a personal services business, and income described in subparagraph (a)(i) of the definition of specified corporate income in subsection 125(7) for the year are generally not considered active business income and are not eligible for the SBD. The following three sections explain when income from these types of businesses may be considered active business income and eligible for the SBD.

Specified investment business

A specified investment business is a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties. It also includes a business carried on by a prescribed labour-sponsored venture capital corporation, the principal purpose of which is to derive income from property.

Except for a prescribed labour-sponsored venture capital corporation, income from a specified investment business is considered to be active business income, and is therefore eligible for the SBD if:

• the corporation employs more than five full-time employees in the business throughout the year, or

• an associated corporation provides managerial, financial, administrative, maintenance, or other similar services to the corporation while carrying on an active business, and the corporation would have to engage more than five full-time employees to perform these services if the associated corporation were not providing them

  Note
  The business a credit union carries on, or the business of leasing property other than real property, is not considered specified investment business.

Personal services business

A personal services business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform. Instead, an individual performs the services on behalf of the corporation. That individual is called an incorporated employee.

Any income the corporation derives from providing the services is considered income from a personal services business, as long as both of the following conditions are met:

• the incorporated employee who is performing the services, or any person related to him or her, is a specified shareholder of the corporation

• the incorporated employee would, if it were not for the existence of the corporation, reasonably be considered an officer or employee of the entity receiving the services

However, if the corporation employs more than five full-time employees throughout the year or provides the services to an associated corporation, the income is not considered to be from a personal services business. Therefore, the income is eligible for the SBD.

Deductions in computing income for a personal services business are restricted to the following:

• salary, wages, or other remuneration of the incorporated employee

• cost of other benefits or allowances provided to the incorporated employee

• certain expenses of the corporation associated with selling property or negotiating contracts

• legal expenses paid in the year by the corporation in collecting amounts owed for services rendered

  Note
  Any expenses denied must be added back on Schedule 1.

For more information on the factors to take into account when a person is considered an employee, see Guide RC4110, Employee or self-employed? or go to canada.ca/cpp-ei-rulings.

Reference
Paragraph 18(1)(p)

Specified corporate income

Generally, where a CCPC earns income that would otherwise be considered as income from an active business from providing property or services to another private corporation and it (or one of its shareholders) or a person who does not deal at arm's length with the CCPC (or one of its shareholders) holds a direct or indirect interest in that other private corporation, the income would not be considered as being eligible for the SBD unless certain conditions are met.

For more information, see the definition of specified corporate income in subsection 125(7).

Specified farming or fishing income

The definition of specified farming or fishing income replaced the definition of specified cooperative income, which has been retroactively repealed. The definition of specified corporate income excludes specified farming or fishing income, so that such income stays eligible for the SBD by default.

Specified farming or fishing income, of a corporation for a tax year, means income of the corporation (other than an amount included in its income under subsection 135(7), patronage dividends), if both of the following conditions are met:

• the income is from the sale of the farming products or fishing catches of the corporation's farming or fishing business to another corporation

• the corporation deals at arm's length with the other corporation

This approach eliminates the requirement that sales have to be to a farming or fishing cooperative corporation in order to be excluded from specified corporate income.

Specified shareholder

A specified shareholder is a taxpayer who owns, directly or indirectly at any time in the year, at least 10% of the issued shares of any class of capital stock of the corporation or a related corporation.

How to calculate income from an active business carried on in Canada

Generally, to calculate active business income from carrying on a business in Canada, you have to deduct from net income for income tax purposes any of the following amounts that apply:

• taxable capital gains minus allowable capital losses

• dividends that are deductible from income under sections 112 and 113, and subsection 138(6)

• property income minus property losses

• property income from an interest in a trust

• foreign business income

• income from a specified investment business

• income from a personal services business

• income described in subparagraph (a)(i) of the definition of specified corporate income in subsection 125(7) for the year where certain conditions are not met

Specified partnership income

A corporation that is a member (or a designated member) of a partnership has to complete Schedule 7 to calculate its active business income.

The specified partnership income rules impose a limit on the amount of active business income earned by a corporation as a member or designated member of a partnership that is eligible for the SBD. The eligible amount is referred to as specified partnership income and is added to the corporation's active business income from other sources, if any.

For members of a partnership, their specified partnership business limit is normally their pro-rata share of a notional $500,000 business limit for the partnership.

For designated members of a partnership, their specified partnership business limit is nil, unless they get an amount assigned from a member of the partnership.

If the partnership incurs a loss from carrying on an active business, you have to deduct the corporation's share of that loss from its active business income. This is referred to as a specified partnership loss.

If your corporation is a member of a partnership in respect of which it filed a Schedule 73, you have to add or deduct the total active business income determined under section 34.2.

If the corporation received an information slip T5013, Statement of Partnership Income, that shows its share of partnership income or loss, keep it in case the CRA asks for it later. Do not include this form with the return. For more information, see page 35 and Guide T4068, Guide for the Partnership Information Return (T5013 Forms).

On line 400, enter the total active business income you calculated on Schedule 7.

References
Subsections 125(1), 125(7), 125(8), and 248(1)
Section 251
IT-73, The Small Business Deduction

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