Eligibility requirements for campgrounds in order to claim the small business deduction
The government is committed to ensuring tax fairness for the middle class, and recognizes the importance of small business in creating jobs and supporting the economy. The Canada Revenue Agency (CRA) reviews tax returns to ensure that taxpayers are complying with the law, as enacted by Parliament, including any claims for the small business deduction. The CRA wants to provide information to campground operators in order to help them determine whether they would be eligible for the small business deduction.
Under the Income Tax Act, a corporation must meet certain requirements in order to be eligible for the small business deduction. In particular, the small business deduction is not available to a corporation that carries on a “specified investment business”. A corporation’s business is considered a specified investment business if the principal purpose of the business is to earn income such as interest, dividends, rents and royalties from property (other than a business carried on by a credit union or a business of leasing property that is not real or immovable property). One of the exceptions to this rule is if the corporation employs more than five full-time employees in that business throughout the year. To provide information to taxpayers, the CRA has published guidance (for example, Interpretation Bulletin, IT-73R6 - The Small Business Deduction and Guide T4012, T2 Corporation - Income Tax Guide 2015) and there is also a significant body of case law available to inform them as to what constitutes a specified investment business.
The determination of whether a corporation’s business is a specified investment business is a question of fact. The CRA considers the specific facts of each case in order to determine whether a corporation’s income is eligible for the small business deduction.
Generally, the business of a campground involves the renting of property and providing basic services typical to that type of rental operation. In such a situation, the principal purpose of that business would be to earn rental income from real or immovable property and the corporation would not be 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 may consider it eligible for the small business deduction. Some of the additional services typical to this industry include coin operated laundry, swimming pool/lifeguard, playground, refuse disposal, retailing food and supplies, etc. Providing services such as these may change the principal purpose of the business from a 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.
In 2015, representatives from the tourism industry and affected businesses participated in consultations on the eligibility requirements for the small business deduction. This issue was also raised as part of the government’s pre-budget consultations held in January and February of 2016. Following the consultations, the government announced in Budget 2016 that it was not proposing any modification to these rules at this time.
The small business deduction has been available to eligible taxpayers for a long time. The specified investment business rules make it clear that if a corporation’s only business is one whose principal purpose is to earn income from renting out real property, it is not eligible for the small business deduction. These specified investment business rules are longstanding and have not changed.
The CRA is committed to ensuring that business owners have all the necessary information to determine whether they are eligible for the deduction. There are on-going efforts and planned communications to ensure that Canadians understand their tax obligations.
Taxpayers who disagree with a notice of assessment or reassessment may file an objection through the formal process. Further information on how to resolve income tax disputes can be found on the CRA website.
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