October 2019 Newsletter

Campground business not entitled to small business deduction

In the recent 1717398 Ontario Inc. (Lost Forest Park) case, the taxpayer corporation operated a campground and facility for campers and recreational vehicle (RVs). In the taxation years in question, the corporation attempted to claim the small business deduction (see above) on the grounds that it carried on a business and that earning rental income was not the principal purpose of the business. (The corporation did not employ more than 5 full-time employees throughout the year, so the exception described above did not apply.)

The CRA denied the small business deduction on the grounds that earning rental income was the principal purpose of the taxpayer’s business. On appeal to the Tax Court of Canada, the Court considered the taxpayer’s arguments regarding other services it supplied, such as storage facilities, picnic tables and fireplace sites, a swimming pool, a laundry room, and certain athletic facilities. However, the Court concluded that “the services and amenities offered by the Appellant were not sufficient to reach the tipping point” whereby the provision of the services outweighed the rental of the property. Therefore, the Court agreed with the CRA that the principal purpose of the business was to earn rental income, and the small business deduction was disallowed.

“Signing bonus” was a capital gain, not ordinary income

In the 2018 Ritchie case, Ritchie owned some farm property on which a pipeline company planned to construct part of a pipeline project. Ritchie agreed to allow the pipeline to be installed on his property, in exchange for a payment of $254,870 that was identified as a “signing bonus” in the agreement with the company.

Ritchie reported the payment as a capital gain and thus included half of the payment in his income as a taxable capital gain. The CRA reassessed him, taking the position that the payment was business income (fully included in income). One of the CRA’s arguments was that the payment was received in the course of Ritchie’s income-earning activity of farming and did not relate to the disposition of capital property.

On appeal, the Tax Court of Canada held that the farming business was carried on by Ritchie’s corporation and not by him personally. As a result, it could not be said that Ritchie received the “signing bonus” in the course of earning income from a farming business, since the corporation rather than he carried on the farming business. The Court held the amount was paid in respect of Ritchie’s disposition of a capital property, being an interest in his land, so it was a capital receipt and gave rise to a capital gain. Thus, his appeal was allowed and the CRA’s reassessment was overturned.

Last modified on October 9, 2019 12:00 am
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