A Tax Court of Canada ruling this month is set to have a major impact on the owners and operators of Canadian business of all sorts, particularly mini storage businesses.
Justice Campbell Miller in 0742443 B.C. Ltd. v. The Queen (2014 TCC 301), a case I was alerted to by Jesse Brodlieb at http://www.canadiantaxlitigation.com, found that for the purposes of the small business deduction under the Income Tax Act, the mini storage business was a “specified investment business” because its principal purpose was deriving income from property. As a result, the Appellant company was unable to access the small business deduction or indeed any of the preferential rates for active business income.
This is, for taxpayers with mini-storage businesses, a massively unsettling result. It should be equally unsettling to any business that includes an element of space rental of any kind, from music studios to (absurd as this may sound) server co-location. If you have a business that incorporates any sort of rental of space, or allowing customers to use your space, I recommend that you make an appointment to see a tax advisor as soon as possible. This applies not just to your tax going forward, but your position on previous filings. It seems likely (if not certain) that CRA will use this to take extremely aggressive positions in audit.
Crucial to the decision was that, while CRA admitted under cross-examination that the meaning of “principal purpose” was a numerical test (that is, that over 50% of the purpose is deriving income from property) in the end the judge dispensed with this numerical test altogether. This was especially important since CRA had led no evidence regarding what portion of the business was related to deriving income from property. This would have been easy to do; it’s easy to calculate square-footage rental values. Instead, the judge simply substituted his own belief that the taxpayer supplied “a few services to a few customers”, assumed that was determinative of the value, and left it there. Comparisons to a hotel or motel were drawn out of the blue and without reference to the pleadings and, surprisingly, the judge concluded that those services were not provided by the taxpayer even though some (electricity, parking, use of supplementary items) clearly were so provided.
There is much else that I find unappealing about Campbell Miller J.’s decision, not least the insistence that the “security system” of the Appellant is itself “part of the property” which is patently absurd and an important misunderstanding of what a security system is. Equally unappealing is the insistence that the provision of services was unimportant to customers, who were merely seeking “the space itself”. This is, to my mind, absurd: the entire point of mini storage is the safety and security it provides. I’ve been a mini storage customer before. I don’t want “space”; I want security for my stuff.
“Inside baseball” arguments over pleadings
Also troubling about the case, all the more so for its mystery, was a dispute over faulty, inadequate or deficient pleadings entered by counsel for the Crown respondent. Taxpayers, please forgive the “inside baseball” aspect of this part! The hint, although it is a bare hint, is that the Respondent counsel were making assumptions of law within their recital of facts. Without (in my view) addressing the substance of those claims, Campbell Miller J. simply dismissed them (as, apparently, he had dismissed earlier attempts to strike portions of those pleadings) as unimportant to the substance of his own purpose as judge. I do not agree with this point about the procedural importance of pleadings, not least because I have frequently seen self-represented taxpayers have pleadings struck for inadequacies of this nature, and what is sauce for the self-represented goose is surely even more appropriate to the well-resourced, taxpayer-funded gander. Encouraging the submission of inadequate and sloppy pleadings by counsel, on the grounds that the Court has a job to do and it doesn’t want to be distracted by procedure, is unhelpful to litigants and (in my opinion) to the Court itself. It will have particularly bad effects where the Crown has licence to plead inadequately in self-represented appeals: those litigants may well feel they have to demolish the legal assumptions made.
The takeaway for taxpayers remains important: there are large amounts of money at stake here, tens of thousands of dollars a year even for small storage businesses, and potentially much more especially with historical liability. Getting good advice is going to be essential for anyone whose business involves allowing people to use your space.
(NOTE: I updated this post on October 21st with a new paragraph related to some of the further deficiencies in the decision.)
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