Commercial real estate tax services: property income, active income, and the line between

Is this property income, or is it a specified investment business?

A corporation earning income principally from renting property does not qualify as an active business, and it loses the small business deduction. That is unless it employs more than five full-time employees throughout the year. That is the same specified investment business rule that applies to any rental operation. A plaza or industrial building run almost entirely through a third-party property manager sits squarely on the wrong side of that line. That is especially true where the owner's corporation itself employs nobody directly. A larger portfolio with genuine in-house leasing, maintenance, and management staff has a stronger case. But it still needs the headcount to support it. See our note on how passive income affects the small business deduction for how the numbers actually move. The same characterization also decides whether a share sale of the corporation could ever qualify for the lifetime capital gains exemption. A corporation whose principal source of income is a specified investment business generally fails the active-business-asset test the exemption requires. That can rule out an otherwise attractive exit before it is even proposed. We review this well before a sale is priced, not after an offer arrives.

GST/HST on the purchase: usually no cash to the vendor at all

When a GST/HST registrant buys a commercial building from another registrant for use in a commercial activity, the vendor generally does not collect HST at closing. The purchaser self-assesses the tax owing directly on their own GST/HST return instead. For a fully taxable use, that typically nets to nothing out of pocket, once the matching input tax credit is claimed on the same return. Getting the closing certification of registrant status wrong is one of the more common and expensive mistakes we see in commercial real estate closings. That is because CRA can look to the purchaser for the tax if the mechanism is not documented correctly. This is exactly the kind of detail that belongs with your accountant before closing, not discovered after.

CCA, recapture, and a sale priced off someone else's cap rate

The building sits in Class 1, generally at 4 percent. On a sale, recapture of the CCA claimed — up to the property's original cost — is fully taxable income in the year of sale. Only the appreciation beyond original cost is taxed as a capital gain. Commercial properties trade off market cap rates that move with institutional and REIT buying activity, rather than with anything the owner controls. Because of that, a sale can trigger a recapture bill well beyond what years of modest CCA claims would suggest. That happens simply because the market re-rated the asset.

Refinancing without losing the interest deduction

Pulling equity out of one property to fund another, or to cover portfolio-wide operating costs, is common. But interest deductibility depends on tracing the borrowed funds to their actual income-earning use. The courts, including the Supreme Court's decision in Singleton, have accepted carefully structured tracing even where the underlying economics looked more personal at first glance. But a refinance that mixes personal and investment use without contemporaneous documentation is exactly the kind of position CRA challenges on audit. We document the use of every refinance dollar when it happens, not when the return is filed months later.

Capital gain, or an adventure in the nature of trade?

Where an owner acquires, improves, and quickly resells a commercial property, CRA and the courts look past the "investment" label to the taxpayer's intention and conduct at acquisition. Financing structure, marketing effort, and how quickly the resale followed the purchase all matter. A pattern that looks more like trading than holding is taxed as fully taxable business income rather than a capital gain. That also puts the purchase-day GST/HST self-assessment question back on the table for the resale itself. The badges the courts look at include how the property was financed, how actively it was marketed, and the owner's stated intention at the time of purchase. That intention needs to be documented at the time, not reconstructed to fit the tax result the owner would prefer after the fact. A corporation carrying a large recapture or fully taxable gain from this kind of sale should also expect to move onto quarterly tax instalments the following year. That is worth planning cash flow around, rather than discovering it when the first instalment reminder arrives. Owners with US property in the mix should see our cross-border tax guide for commercial real estate investors, and the wider toolkit is at tax services.