IT-73R6 "The Small Business Deduction" 26 March 2002

5 ...In examining the ordinary dictionary meaning of these words, "incident to" generally includes anything that is connected with or related to another thing, though not inseparably, or something that is dependent on or subordinate to another more important thing. "Pertains to" generally includes anything that forms part of, belongs to or relates to another thing.

The courts have found that, in interpreting the meaning of "pertains to" or "incident to" in context, there has to be a financial relationship of dependence of some substance between the property in question and the active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation. In addition, the operations of the business have to have some reliance on the property such that the property is a back-up asset that could support the business operations either on a regular basis or from time to time.

Reserve claimed against business income is business income when reversed

4. ... If the original gain on the sale of real property was categorized in a previous year as income from an active business, amounts included in income in subsequent years in respect of the realization of the mortgage reserve pursuant to subparagraph 12(1)(e)(ii), are considered to be income from an active business. This also applies to any mortgage interest received pertaining to such mortgage.

Meaning of "pertains to" or "incident to"

5. … The courts have found that, in interpreting the meaning of "pertains to" or "incident to" in context, there has to be a financial relationship of dependence of some substance between the property in question and the active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation. In addition, the operations of the business have to have some reliance on the property such that the property is a back-up asset that could support the business operations either on a regular basis or from time to time.

Whether corporation’s profit is from property

8. If a corporation is incorporated to earn income by doing business, there is a general presumption that profits arising from its activities are derived from a business … . However, in some circumstances, a corporation's entire profits can be characterized as income from property, as might be the case where the corporation is formed for the sole purpose of holding shares of a second corporation or holding a property to be rented with limited landlord responsibilities. It is, of course, quite possible that a corporation will earn income from property as well as income from a business carried on, if such property income is not income from another separate business.

Common-law test of employment

19. The condition stipulated in [the midamble] is not met if, in the absence of the corporation, there would be no common law master-servant relationship and the individual who undertakes to perform the services would be viewed as a self-employed individual carrying on a business. The determination of whether an incorporated employee would otherwise be regarded as self-employed or as an officer or employee of the entity to which the services were provided is a question of fact. The following list of factors, although not exhaustive, are indications of employee status:

1. the entity to which the services are provided has the right to control the amount, the nature and the direction of the work to be done and the manner of doing it;
2. the payment for work is by the hour, week or month;
3. payment by the entity of the worker's travelling and other expenses incidental to the payer's business;
4. a requirement that a worker must work specified hours;
5. the worker provides services for only one payer; and
6. the entity to which the services are provided furnishes the tools, materials and facilities to the worker.

Hotel business is services business

A corporation that operates a hotel is generally considered to be in the business of providing services and not in the business of renting real property. Accordingly, the business is normally considered to be an active business rather than a specified investment business.

Reserve claimed against business income is business income when reversed

4. ... If the original gain on the sale of real property was categorized in a previous year as income from an active business, amounts included in income in subsequent years in respect of the realization of the mortgage reserve pursuant to subparagraph 12(1)(e)(ii), are considered to be income from an active business. This also applies to any mortgage interest received pertaining to such mortgage.