REASONS
FOR JUDGMENT
V.A. Miller J.
[1]
The issue in this appeal is whether, in its 2010
and 2011 taxation years, the Appellant was entitled to claim a small business
deduction of $1,532 and $2,277 respectively (the “Deductions”), pursuant to
section 125 of the Income Tax Act (the “Act”).
[2]
The Minister of National Revenue (the
“Minister”) denied the Deductions on the basis that the “principal purpose” of the Appellant’s business was to
derive income from property and that its business was a “specified investment business” as defined in
subsection 125(7) of the Act.
[3]
The only witness at the hearing was Brett Maki
who was agent for the Appellant. He had the Appellant incorporated in 2006.
[4]
It was Mr. Maki’s evidence that the Appellant
was incorporated with the intent that it would purchase houses which could be
developed and resold for a profit. Throughout the period 2006 to 2016, the
Appellant has owned 11 houses which it used as rental properties. Mr. Maki
described these properties and gave a history of their ownership as follows:
a)
109 Guelph Crescent in Saskatoon was purchased
by Mr. Maki in 2001. He used this property as his principal residence until he
remarried. He then moved out of the property and offered it for rent. It was
transferred to the Appellant in 2006 and renovated in 2009. It was listed for
sale in June 2016 and sold in October 2016.
b) 318 Avenue H South in Saskatoon was purchased in 2006 and it was
completely renovated in 2008. According to Mr. Maki, it is presently listed for
sale.
c)
The houses at 409 Avenue C South and 429 Avenue
C South were purchased in 2006. The house at 411 Avenue C South was purchased
in 2008. These houses are located in an “up and coming”
area in Saskatoon. At present there are four condominium buildings being
constructed across the street from the Appellant’s properties. A developer has
offered to purchase these properties for as much as $250,000 but the Appellant
refused because the properties have “more potential”.
At present, these houses are rental properties.
d) In 2008, the Appellant purchased 6 houses in Prince Albert,
Saskatchewan which were used as rental properties. In 2012, the Appellant’s
house at 436 13th Street West in Prince Albert was demolished and a
conjoined duplex was built on the land. In 2013, the Appellant listed all 6 of
its properties in Prince Albert for sale. Two of these properties have sold. The
property at 718 13th Street West sold in 2015 and the property at 1799 12th
Street sold in 2016.
[5]
Mr. Maki stated that the properties were only
rented out to help cover their costs. He stated that he is a property developer
but he cannot buy and sell immediately because he didn’t have the funds to
develop all of the houses when they were initially purchased. It was Mr. Maki’s
goal to own 12 houses, to renovate the houses and to sell them at a profit.
Law
[6]
The relevant provisions in the Act read:
Small business
deduction
125 (1) There may
be deducted from the tax otherwise payable under this Part for a taxation year
by a corporation that was, throughout the taxation year, a Canadian-controlled
private corporation, an amount equal to the corporation’s small business
deduction rate for the taxation year multiplied by the least of
(a)
the amount, if any, by which the total of
(i) the total of all amounts each of which is the income of the
corporation for the year from an active business carried on in Canada (other
than the income of the corporation for the year from a business carried on by
it as a member of a partnership), and (emphasis added)
125(7) In this
section,
active
business carried on by a corporation means
any business carried on by the corporation other than a specified investment
business or a personal services business and includes an adventure or concern
in the nature of trade;
Canadian-controlled
private corporation means a private
corporation that is a Canadian corporation other than
(a) a
corporation controlled, directly or indirectly in any manner whatever, by one
or more non-resident persons, by one or more public corporations (other than a
prescribed venture capital corporation), by one or more corporations described
in paragraph (c), or by any combination of them,
specified
investment business, carried on by a corporation in
a taxation year, means a business (other than a business carried on by a credit
union or a business of leasing property other than real or immovable property)
the principal purpose of which is to derive income (including interest,
dividends, rents and royalties) from property but, except where the corporation
was a prescribed labour-sponsored venture capital corporation at any time in
the year, does not include a business carried on by the corporation in the year
where
(a)
the corporation employs in the business throughout the year more than 5
full-time employees, or
(b)
any other corporation associated with the corporation provides, in the course
of carrying on an active business, managerial, administrative, financial,
maintenance or other similar services to the corporation in the year and the
corporation could reasonably be expected to require more than 5 full-time
employees if those services had not been provided;
Analysis
[7]
In 2010 and 2011, the Appellant was eligible to
claim the small business deduction if it was a Canadian-controlled private
corporation which carried on an “active business”.
For the purposes of section 125, an “active business”
is any business carried on by a corporation other than a “specified investment business” or a personal services
business.
[8]
A “specified investment
business” includes any business with less than six full-time employees
throughout the year and has the “principal purpose”
of earning income from property or the leasing of property.
[9]
The phrase “principal
purpose” in the context of a “specified
investment business” is not defined in the Act but the phrase was
considered by Bowman J. (as he then was) in Prosperous Investments Ltd v
Minister of National Revenue, [1992] 1 CTC 2218 (TCC) at paragraph 13 where
he stated:
In determining
the “principal purpose” of a business carried on by a corporation the stated
object of the person who carries it on is not necessarily the only, or even the
most important, criterion. Of critical importance is what the corporation in
fact does and what its sources of income are: Ben Barbary Company Ltd. v.
Minister of National Revenue, [1989] 1 C.T.C. 2364, 89 D.T.C. 242 at 2366
(D.T.C. 244)
[10]
It is the “principal
purpose” of the Appellant’s business which must be considered and not
the “principal purpose” stated by Mr. Maki: Gill
v Minister of National Revenue, [1999] 1 CTC 2034 (TCC) at paragraph 33.
[11]
Mr. Maki testified that the Appellant’s “principal purpose” in 2010 and 2011 was to earn
income from the purchase and sale of real property. The documentary evidence
does not support his testimony.
[12]
In its 2010 and 2011 income tax returns, the
Appellant described its operations as the “rental of
residential properties”. It declared that 100% of its revenue was earned
from the rental of residential properties.
[13]
The Appellant claimed capital cost allowance on
its properties in each of the 2008 to 2011 taxation years.
[14]
At the hearing, in response to a question from
me, Mr. Maki stated that when the Appellant sold the various properties, it
reported a capital gain. However, after the hearing, he wrote to the Court that
he had been mistaken and that the Appellant had reported the gain as income.
[15]
Mr. Maki’s out of court statement is not
evidence before me.
[16]
It is my view that the Appellant’s “principal purpose” in 2010 and 2011 was to earn
income from the rental of residential properties.
[17]
During his testimony, Mr. Maki agreed with the
assumptions made by the Minister that:
a)
The Appellant was not associated with a
corporation that provided managerial, administrative, financial, maintenance or
other similar service to it; and,
b) At all material times, the Appellant did not have more than five
full-time employees.
[18]
More specifically, Mr. Maki stated that the
Appellant has never had any employees.
[19]
As a result, it is also my view that the
Appellant is a “specified investment business”.
It did not earn income from an “active business”
in 2010 and 2011 and it is not entitled to the small business deduction.
[20]
The appeal is dismissed.
Signed at Ottawa, Canada, this 22nd day of November 2016.
“V.A. Miller”
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