Kenneth Keung, “Anti-Intermediary Rules in Section 125” , Canadian Tax Highlights 25:2 (February 2017) provides a handy summary of the carve-outs from income eligible for the small business deduction (SBD) as follows:
- ABI earned from a partnership in which the corporation or its shareholder holds a direct or indirect interest, or a person that holds such an interest is not dealing at arm’s length with the corporation, which does not earn all or substantially all of its income from arm’s-length customers (clause 125(1)(a)(i)(A); “the clause A carve-out”);
- ABI earned from another corporation in which the corporation, its shareholder, or a person not at arm’s length with either holds a direct or indirect interest, and the corporation does not earn all or substantially all of its income from arm’s-length customers (clause 125(1)(a)(i)(B); “the clause B carve-out”); and
- Deemed ABI under subsection 129(6) that is earned from a non-CCPC or a CCPC that elected under subsection 256(2) not to be associated (clause 125(1)(a)(i)(C)).
The article also provides examples of the intended and (probably) unintended application of the rules to multiple PC structures and supply chain structures (among others).