Mini-storage business not eligible for small business deduction
The small business deduction reduces the federal tax rate for the first $500,000 of active business of a Canadian-controlled private corporation to 11% (for 2015). The rate is reduced further to 10.5% for 2016 and another 0.5% per year until 2019, when it will be 9%.
Active business income includes most business income, but it does not include a “specified investment business”, which is a business the principal purpose of which is to earn income from property (such as rent). An exception to the specified investment business rule applies if the corporation employs more than five full-time employees throughout the year.
In the recent case of 0742443 BC Ltd., the corporation carried on a business of providing self-serve storage facilities. The corporation claimed the small business deduction, but the CRA denied it on the grounds that the corporation was carrying on a specified investment business. The CRA position was upheld by the Tax Court of Canada, and the taxpayer further appealed to the Federal Court of Appeal.
The Court of Appeal upheld the decision and disallowed the corporation’s small business deduction. The Federal Court held that the principal purpose of the corporation’s business was to earn rental income by renting out its storage space. Even though it provided some other services such as snow removal at the facility, these services were simply incidental to the business of earning rental income, and the income was income from property.
NOTE: In the 2015 Federal Budget, the Department of Finance indicated that some businesses have expressed concern as to the application of the small business deduction rules in cases such as self-storage facilities and campgrounds. The Department announced a review of the circumstances in which income from a business, the principal purpose of which is to earn income from property, should qualify as active business income. It invited interested parties to submit comments. To date, the Department has not provided further comments in this regard. Furthermore, it is not clear whether the new Liberal government will follow through on this review, which was announced during the previous Conservative government’s tenure. Hopefully more details will follow.
This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.