CRA notes that the s. 129(6) income recharacterization rule is not relevant to whether a corporation carries on an active business for purposes of being a relevant group entity

Mr. X owned all the voting shares (with a nominal value) of A, B and D, and held preferred shares of A with a substantial value. D carried on an active business in a building leased by it from C, which was wholly-owned (as its only asset) by B. The assets of A consisted exclusively of advances to B, C and D. Upon the disposition by Mr. X of his shares of A to a “Buyco” owned and managed by his adult children, the family trust holding non-voting common shares of A, B and D will distribute its shares of A and D to Buyco.

In finding that B and C likely would not be relevant group entities (RGEs) in respect of the disposition to Buyco (so that it would not contravene s. 84.1(2.31)(c)(iii) for him to retain the voting control of B and, thus, of C), CRA stated that, although s. 129(6) might deem the rental income earned by C to be income from an active business for s. 125 purposes, this would not result in C being deemed to carry on an active business for the purposes of s. 84.1(2.31)(c)(iii). Since C did not carry on an active business, it could not be an RGE, whose definition relevantly refers to any person—other than the subject corporation and the purchaser—that, at the time of disposition, carries on an active business that is relevant to determining whether the subject shares are QSBCS.

Neal Armstrong. Summaries of 15 December 2025 External T.I. 2025-1062551E5 F under s. 84.1(2.31)(c)(iii) and s. 256(5.1).