Determine the amount active business income eligible for the small business deduction
Problem
You, a tax professional working at a local accounting firm, have just received a request from Terry, an assurance partner in the office, asking you to prepare a memorandum to one of his client tax files. He would like you to determine the amount of active business income eligible for the small business deduction his corporate client is entitled to claim on its T2 Corporation Income Tax Return for the year ended December 31, 2010.
Terry is working on the T2 Corporation Income Tax Return for Regina Capital Inc. (RCI). RCI is owned 100% by Ryan Kiefer. RCI is in the construction business and has a December 31st year-end. All of its assets are used in this business except for its investment in two partnership:
1) Constructor One Partnership which is also in the construction business and generates active business income for the year ended December 31, 2010 of $ 300000. RCI's share of the partnership income is 40% with the remaining 60% allocated to Holdco One Inc. an arm's length party.
2) Rental Two Partnership carries on a rental business. It has developed, and currently owns, over 20 separate rental properties. For the partnership year ended December 31, 2010 the partnership earned rental income of $425000 before claiming capital cost allowance of $ 325000. RCI owns 50% of Rental Two Partnership and the remaining 50% is allocated to Investco Two Ltd. also an arm's length party. The partnership interest is Investco Two Ltd.'s only asset. Rental Two Partnership has employed seven full-time employees in its rental operations for the entire year ending December 31, 2010.
RCI's income from carrying on its own active business for the year ended December 31, 2010 is $130000.
Required
Determine the amount of RCI's active business income eligible for the small business deduction for the year ended December 31, 2010 and prepare a memorandum to the tax file as requested.
