In April 2016, the Canada Revenue Agency (CRA) ruled that a private, family run campground in Ontario did not qualify for the small business tax rate. The CRA ruled the campground’s principle purpose is to derive rental income instead of providing a service, so it should be paying three times what small businesses pay. The ruling left the campground operators facing payment on a huge back tax bill.
TIANS has been working to gather information about what this ruling in Ontario could possibly mean for campgrounds here in Nova Scotia. Together with the Campground Owners Association of Nova Scotia (COANS), we enlisted TIANS member Debi J. Peverill, Chartered Accountant at SBR Communications Inc., to ask her for advice for our campground members in regard to what the CRA ruling could mean for Nova Scotia campgrounds. Debi provided some basic information for distribution and answered questions at the June 8th, 2016 COANS Board of Directors meeting. From there, we have compiled further information about this issue and present it below for your review:
Without the small business deduction, incorporated campgrounds are required to pay 44% tax on their yearly revenue.
- Active business under $350,000 of taxable income in NS 14%
- Passive income in NS 44% plus a refundable tax of 6.67%. The refund applies when dividends are taken from the corporation
Implications of the Ruling:
This CRA ruling has set precedence placing campgrounds in the same category as apartment buildings, mobile home parks, and other full-time residential complexes. For many years, campgrounds in Canada have relied on the small business tax deduction, just like every other typical small business.
Recent decisions by CRA have assessed some campgrounds as a “specified investment business” and as a result not eligible for the small business tax deduction.
A specified investment business is described as:
- A business where the principal purpose of which is to derive income from property; and,
- A business that does not employ more than five full-time employees.
What CRA Policy Says:
Income from business is taxed at a lower effective rate due to the availability of the small business deduction, which does not apply to property income. Another way to say this is to refer to business income as active income and income from property as passive or inactive income. The small business deduction cannot be used to reduce the tax on income from property.
- Income from property (passive or inactive income) – is income from an apartment building or rentals
- Business income (active income) – is income from products and services, or from service focused accommodations typically likened to those provided by a hotel, motel or inn
Campgrounds fall in between these two examples. A campground with a high percentage of seasonal lot rental income is closer to being considered as earning only income from property. Income from renting a site for the entire season, or for the year, runs the risk of being characterized as rental income rather than business income.
Income from operating a store, selling firewood, or from providing other types of services, would be considered active income. Transient business, which are daily or weekly campers who pay a daily rate, can also fall into the active income category.
There is an exception. A corporation earning rental income which has five full-time employees is considered to be operating an active business and, is therefore, eligible for the small business deduction.
If you have less than five employees CRA can argue that you don’t qualify for small business tax because with under five employees CRA can consider you a more rental-focused business as opposed to activity and service focus. This is where the concept of campgrounds being “too small” to get the small business deduction comes from.
It is important to note that none of this applies to a campground that is not operating as a corporation.
What You Can Do:
Remember that CRA looks at businesses on a case by case basis where operators have the chance to explain the activities at the campground and the revenue collected. Separating revenue streams between rental and sales will be crucial to reducing the income taxed at the higher rate.
- Campground owners should talk with their own accountants to get advice specific to their businesses. Your own accountants will be familiar with how your business operates and will be able to provide custom advice
- Operators must begin to ensure there is a definite separation from their seasonal camper business income and all other business income
- Operators should use time sheets to track and log their daily activities and tasks. This will show the amount of service focus work and activities you put into your business on a daily/weekly/monthly basis
Currently, campgrounds in Nova Scotia have not been affected by the recent CRA ruling. As the voice of tourism in Nova Scotia, TIANS will continue to work with our members to stay on top of this issue; please keep in touch with us. Working together will ensure Nova Scotia’s interests are protected.
Written by: Jennifer Falkenham