Jan 28th, 2020
Sep 1st, 2015
By Steven Sitcoff
The Canada Revenue Agency (“CRA”) has initiated an audit project of owners of corporate aircraft and their shareholders. These audits propose to assess taxable benefits to shareholders who make personal use of the aircraft and to deny the deduction of that portion of operating expenses to the corporation. What is particularly disconcerting is the methodology used by the CRA to determine the value of such benefits.
The prior position of the CRA in this regard was expressed in Interpretation Bulletin IT-160R3, dated February 19, 1992, which stated that where a corporate aircraft is owned or leased primarily for business purposes and the main purpose for a particular flight is for the personal use of the aircraft by a shareholder or employee and/or their friends and family, the following positions applied:
Normally, a taxable benefit would be assessed to the shareholder in respect of non-business use based on the value of equivalent first-class airfare on a regularly scheduled flight to the same destination;
However, the determination of the value of such benefit on the basis of equivalent first-class airfare may be considered unreasonably low in cases of “extensive” personal use (i.e. 1/3 or more of total flying time), or unreasonably high where many friends or family accompany the shareholder on the flight; in either such case, the value of the benefit would instead be based on the lesser of prorated operating costs or the cost of a comparable charter flight; and
the corporation will still be permitted to deduct reasonable operating costs (including annual capital cost allowance claims) where attributable to personal use by an employee, but not by a shareholder.
The latter position was cancelled on September 30, 2012 but not replaced with a new position until recently. In particular, on March 3, 2015, the CRA released Technical Interpretation 2014-0527A41I7 (the “2015 Position”), which states the following:
IT-160R3 is in principle applicable for taxation years preceding its cancellation;
For taxation years after the cancellation of IT-160R3, the cost of equivalent first-class airfare is no longer an accepted measure of the value of a taxable benefit in respect of personal use of a corporate aircraft;
Based on the case law, the value of the taxable benefit in this regard must be based on its fair market value and reasonable, based on what the shareholder would have had to pay to an independent company to obtain the same benefit in similar circumstances. Although there is no absolute rule to determine this amount, they are of the view that the relative operating and ownership costs provide a reasonable measure; and
The corporation will not be permitted to deduct expenses relating to the personal use of the aircraft.
Based on the 2015 Position, it is apparent that the current approach adopted by the CRA is to deny the deduction of the corporate owner’s expenses in proportion to the personal use and to assess a taxable benefit to the shareholder based on the total of the following:
The annual fixed and variable operating costs in proportion to the personal use based on the relative number of flying hours in the year, plus GST and QST; and
The portion of capital cost allowance claimed by the corporation in the year attributable to the personal use.
The latter approach was apparently reached by reference to case law involving luxury homes and luxury yachts but these are not, in our view, analogous to corporate aircraft. In particular, the only common element between a luxury home and an aircraft is that both may be considered to be luxuries. Meanwhile, a luxury yacht is typically recreational in nature whereas an aircraft is used as a means of transportation from one place to another.
Two court decisions are of particular note in this regard, both of which were cited in the 2015 Position. First, in the decision of the Tax Court of Canada in Woods, 85 DTC 479, the Court stated:
Although, an evaluating formula based on operating costs and capital cost allowance may well be correct under certain circumstances, it is not necessarily the best nor the only acceptable method of computing the value of benefits…
Also, in the Youngman decision, 90 DTC 6322, the Federal Court of Appeal stated:
In valuing a benefit allegedly received by a shareholder, it is therefore necessary to find what the shareholder would have had to pay for the same benefit in the same circumstances if he had not been a shareholder of the company.
Accordingly, we are of the view that the position taken by the CRA in this regard is not well-founded and would result in the assessment of unreasonably high taxes. Rather, bearing in mind the above-noted comments in Youngman, a more reliable comparable in these circumstances would be the cost to charter an equivalent aircraft for the same or similar route based on arm’s length, commercial rates.
Steven Sitcoff is a tax lawyer at Spiegel Sohmer who works on a variety of corporate and personal tax planning matters, as well as representing clients in disputes with tax authorities.
Jean-Philippe Côté is a tax lawyer at Spiegel Sohmer Inc. who works in the areas of corporate reorganizations and estate planning. He also represents taxpayers in their disputes with the tax authorities.