The small business deduction ("SBD") is a tax-preference provided to certain privately-held Canadian corporations, and only in respect of certain types of income. More specifically, the SBD provides for a reduction of the rate of federal income tax on the first $500,000 of active business income earned in Canada by a "Canadian-controlled private corporation", in accordance with the rules established in the Income Tax Act (Canada) (the "Act"). The provinces generally offer a similar rate reduction, although the threshold below which the rate applies may vary.
The definition of "active business carried on by a corporation" in subsection 125(7) of the Act excludes a business that is a "specified investment business" ("SIB"). In general, this prevents a corporation from accessing the SBD where the principal purpose of the corporation's business is to derive income from property, subject to limited exceptions.
In 0742443 B.C. Ltd. v. The Queen (2014 TCC 301), the Tax Court considered whether the taxpayer's business of providing mini-storage and associated services was a SIB.
The Crown's position was that the taxpayer clearly earned income from property – the storage units were rented out for a fee based on an established schedule, and the presence of some ancillary services did not change this principal purpose. The taxpayer disagreed, arguing that it was providing numerous services akin to those provided by a hotel, which is generally understood to be a services business and not a SIB.
The taxpayer's counsel argued that the Crown's assumptions were fundamentally misguided. Further, the rules in the Act permitting (and denying) the SBD were ambiguous, and such ambiguity should be given a liberal interpretation in favour of the taxpayer (i.e., the legislation should be read with the assumption that the intention of Parliament was to enable taxpayers to access the deduction wherever possible).
In a thorough analysis, the Tax Court disagreed with the arguments put forth by the taxpayer. The Court held that the income was clearly rent. The entire pricing structure of the taxpayer's business was from monthly rental income based on the size of a storage unit rented. While the taxpayer was commendable in his efforts to give clients a positive experience, this did not change the nature of the business. In the words of the Court: "a few services to a few customers does not change the inherent nature of income from property". The Court also concluded that there is no ambiguity in the relevant legislation.
In addition, the Court rejected the taxpayer's assertion that it should succeed in the appeal because it had been treated unfairly by the Crown, specifically in respect of the Respondent's "bad and misleading pleadings". The Court noted that pleadings are often imperfect but that does not necessarily prejudice the other side or impede that side's ability to understand the case that needs to be met. There were some concerns regarding the pleading of the assumptions in the Crown's Reply, but the issue was clear, the parties knew what the case was about, evidence was properly led, and the Court was able to determine the correctness of the assessment.
The Tax Court dismissed the taxpayer's appeal.
For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com
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