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.
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
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.
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