The small business deduction applies to the first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC), and results in a combined Federal and Provincial tax rate of about 9%-14%, depending on the province. On the other hand, income from property is subject to a combined rate of about 50%-54%, again depending on the province (some of this is refundable tax that is recovered once dividends are paid out).
Active business income of a CCPC does not include a “specified investment business” (“SIB”), which is a business the principal purpose of which is to derive income from property – including rental income – unless the CCPC employs more than five full-time employees throughout the relevant year. In other words, income from a SIB is taxed the same as income from property.
Campground and mobile home park operators have lobbied the government to allow their businesses to qualify for the small business deduction in those cases where they do not employ more than five full-time employees throughout the year. Due to the seasonal nature of the camping and mobile home parks in Canada, this rule affects many such businesses because they cannot employ more than five employees throughout the year. However, the Department of Finance announced in the 2016 Federal Budget that it had reviewed these rules carefully, and no changes will be made.
The CRA has held that generally, the business of a campground involves the renting of property and providing basic services typical to such a rental operation. As such, the principal purpose of the business is to earn rental income from real property and the corporation is not eligible for the small business deduction, unless it employs more than five full-time employees in that business throughout the year.
However, if a corporation carrying on a campground business does not employ more than five full-time employees throughout the year but does provide “significant additional services that are integral to the success of its business operations”, the CRA states that it may consider the corporation eligible for the small business deduction. Some of the additional services typical to this industry include coin-operated laundry, swimming pool/lifeguard, playground, garbage disposal, and retailing food and supplies. Providing services such as these may change the principal purpose of the business from property rental to providing services. Generally speaking, the more services provided, and the greater the importance of the additional services to the financial success of the business, the greater the likelihood that the corporation may be eligible for the small business deduction.
Unfortunately, the CRA position leaves some campgrounds and mobile home parks in limbo, as the eligibility requirements depend on the level of services provided. One case, where the campground business was found not to be eligible for the small business deduction, is discussed in the next article.