Can rental income be claimed as Active Business Income (ABI)?
In most cases, income from the property will be considered
as passive income and would not qualify for a small business deduction. For
example, rental income is considered a passive income (income from property)
unless the company has 5 full-time employees. However, in a rare circumstance
it can be treated as ABI and eligible for small business deduction limit
without hiring more than five full-time employees as described below:
A corporation may derive income from holding property in
Canada (e.g., income in the form of real estate rentals, interest, or
royalties). If such income is received or receivable from an associated company
and the amount is or may be deductible in determining the associated company's
income from an active business carried on by it in Canada, then paragraph
129(6)(b) deems the income in the recipient's hands to be income from an
active business carried on by it in Canada.
If subsection 129(6) deems rental income to be active
business income and capital cost allowance on the rented building was deducted
in calculating active business income, any recapture of capital cost allowance
on the disposition of the building would also be considered to be active
business income.
