When does rental income become active business income in Canada?

Under ITA s. 125(7) definition of ‘specified investment business,’ a corporation’s rental income is treated as active business income (SBD-eligible) only where the corporation employs more than five full-time employees throughout the year in the rental business. Otherwise the rental corporation is a specified investment business (SIB), and its rental income is taxed at the general corporate rate with no SBD.

The five-employee test. ‘More than five full-time employees’ means at least six FTEs. The employees must be genuinely full-time in the corporation’s rental activity throughout the fiscal year, not part-time superintendents or contract cleaners. Related-party family members counting as employees are scrutinized on audit.

Example: an Ontario RealtyCo owns three commercial buildings, employs one part-time superintendent and outsources property management. It is an SIB. Its 2026 rental profit of $200,000 is taxed at the Ontario general corporate rate (26.5% federal + Ontario combined). No SBD available.

Same RealtyCo scales to 45 buildings, hires six full-time employees (leasing manager, two maintenance techs, two administrators, one CFO), all working full-time on the rental business. Rental income now qualifies as active business income under s. 125(7). First $500,000 taxed at 12.2% SBD rate; excess at 26.5% general rate. Meaningful annual tax saving: about $71,500 per year in reduced federal + Ontario tax on the SBD-covered portion.

Alternative pathway: rental income earned via an associated corporation that provides property management services to unrelated third parties can qualify as active in specific narrow structures. Consult before restructuring; the anti-avoidance rules are aggressive.

Note: The five-employee test does not apply where the corporation is a member of a partnership that meets the test. Partnerships and JVs are common workarounds.

Source: canada.ca — Specified investment business

— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA

Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.