In an August 29, 2019 Tax Court of Canada case, at issue was whether the taxpayer who operated a mobile home/RV park was eligible to claim the small business deduction for the 2012-2014 years. CRA argued that the taxpayer primarily earned its income from the rental of seasonal and extended seasonal campsites and the storage of RVs and, therefore, carried on a specified investment business. Specified investment businesses are not eligible for the small business tax rate. Instead, they are taxed at over 50% in all provinces and territories, although 20.67% may be refunded when dividends are paid.
The taxpayer argued that it carried on an active business providing a significant bundle of services that were integral to its operations.
The majority of the taxpayer’s revenue related to fees charged to seasonal and extended seasonal campers. While shorter-term rents to daily campers occurred, these were much less common.
The Court found that the seasonal and extended seasonal campers were effectively paying to occupy a particular site for either 5 or 10 months of the year and often that, for the remainder of the year, the mobile home or RV was stored unoccupied on site. The Court ruled that the duration of the occupancy agreements in particular (seasonal and extended seasonal versus daily or weekly) suggested quite clearly that the principal purpose of the business was to derive rental income.
While the taxpayer provided other services including garbage pick-up, limited event planning, office hours and “on-call” availability, the Court found that the services and amenities offered did not reach the tipping point where the provision of services overcomes the provision of property. Instead, these features were used to entice customers such that the business could accomplish its principal purpose of earning rental income.
NOTE: Even if the principle purpose of the business was to earn rental income, an exception is available (making the small business rate available) if the business employs more than five full-time staff.
ACTION ITEM: This case may have applicability to all corporations in which there is limited activity. In such cases, consider whether the income results more from the services provided, or for the use of the property. Consider what support or evidence you have that ties income earned to services provided.