Lack of employees means trailer park can’t claim deduction


Thomas McRae

You may think you’re running a company that qualifies for a small business deduction, but Toronto commercial litigator Thomas McRae says a recent decision from the Tax Court of Canada illustrates why failing to follow the statute could put you on the wrong side of the Canada Revenue Agency.

The case involved an incorporated Ontario company that claimed the small business deduction (SBD) for the trailer park it managed. The SBD provides for a reduced corporate tax rate on a private corporation’s active business income but excludes income from a “specified investment business” (SIB) defined as a “business … the principal purpose of which is to derive income from property…” unless it employs, directly or indirectly, more than five full-time employees, according to court documents.

The company was denied the SBD on the basis that it earned its income primarily from the rental of seasonal and extended seasonal campsites and the storage of recreational vehicles and because it didn’t have any employees, except for the son of the principal shareholders, documents state.

“We have a statue that was designed to address one form of possible ‘abuse’ of the tax system and happens to catch people in its net who, in the ordinary course of things, probably should be getting the advantage of the lower tax rate,” says McRae, a partner with Shibley Righton LLP. “They clearly have no problem with it if you employ five people, but his business was so small it didn’t, and so this individual finds himself on the wrong side of the statute.”

The son of the two principal shareholders of the business was employed collecting rent on the campsites, providing recreational vehicle storage and mobile RV sales.

The man argued that the main purpose of the company was not simply to earn income from property, noting he also provided event planning, garbage pickup and on-call availability. However, the court decided that it did not change the character of the income to anything other than rental income, court documents state.

If the business had hired four additional people and had a larger operation, it would have received the benefit of the deduction, McRae explains.

“If he had hired a bookkeeper or maybe someone to mow the lawn — but his misfortune was that the business was so small he couldn’t navigate through the exceptions and get to a better tax result,” McRae tells

He says the SBD is a “labyrinthine” statutory provision with various exemptions that “appear to be policy-driven.”

“If you don’t find yourself with the benefit of the policies inherent in the statute, you’re out of luck,” McRae says. “I understand exactly what he was feeling. He thought, ‘This is my business, this is the way I’m running it, and it is a small business, so why shouldn’t I get the small business tax rate?’ But he had the weight of the statute and precedents — which followed the statute — working against him.”


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