Whilst many of us have been enjoying the bout of good weather with outdoor activities including camping or the use of campground facilities, the same cannot be said for the owners of such facilities.
Private campgrounds across Canada have been under fire recently after CRA decided that certain campgrounds are too small to qualify for the small business deduction, a decision that could increase the tax rates of such entities from 15% to approximately 50%! This decision by CRA could mean that smaller campgrounds may not be able to improve or expand their properties and would be forced to hike their rates. Some would likely have to sell or close.
The decision suggested that a campground was more like a ‘specified investment business’ rather than an ‘active business’. A specified investment business is a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties. Such income is generally taxed at the highest for corporations.
One of the factors in the decision is that campgrounds are a seasonal business with seasonal staffing, hence may not maintain the minimum number of employees to meet the definition required to qualify as an active business which would qualify for the small business tax rate of 15%.
In 2015, the Conservative government said it would review the regulations, however, when the government changed hands, the Liberals said the review was complete and that no changes would be made.
HOWEVER, THERE IS GOOD NEWS…..
CRA recently released further guidance for the eligibility requirements for campgrounds in order to claim the small business deduction. CRA considers the specific facts of each case in order to determine whether a corporation’s income is eligible for the small business deduction. CRA has been careful to reiterate its definition of specified investment businesses, however, it has said that 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 integral to the success of its business operations, CRA may consider it eligible for the small business deduction.
Additional services typical in 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 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.
The above comes as a relief to many campground owners who generally provide ancillary services over and above simply renting out their premises.