Jan 26th, 2023
Mar 12th, 2018
The Canada Revenue Agency (CRA) has had no clearly articulated policy as pertains to the assessment of taxable benefits for the personal use of corporate aircraft by an employee or shareholder since September 30, 2012, when it cancelled Interpretation Bulletin IT-160R3. This became especially problematic in 2015, when the CRA initiated a national audit project in this regard.
Fast forward to 2017, when the CRA attempted to come up with a new policy. However, the unpublished early drafts that emerged prescribed a rather punitive set of consequences, leading to much concern in the business aviation community.
Finally, on March 7, 2018 the CRA released the final version of its new internal policy (CRA document AD-18-01); presumably, a public iteration will be released shortly. The new policy, while not as permissive as that under the old interpretation bulletin, is still a vast improvement over the recent draft proposals, albeit with a few wrinkles to be wary of.
Consequences to the shareholder/employee
The new policy begins by noting that “the basic principle of valuing these taxable benefits has not changed”. However, what is new is that the CRA has set out a distinct set of rules to be applied in three mutually exclusive scenarios, as follows:
Scenario 1: Passengers accompanying a shareholder or employee travelling for a business purpose
Where a shareholder or employee takes a flight and both the flight and their presence on the flight have a clear business purpose (i.e. the business purpose for taking that flight is not ancillary to a personal purpose such as a vacation) there will generally be no taxable benefit. However, if that person is accompanied by others (whether another shareholder or employee not covered by scenario 3, and/or family members or friends) traveling for personal reasons, the relevant shareholder or employee will be assessed a taxable benefit equal to the highest priced ticket available (presumably, business class) for an equivalent commercial flight for each such person.
Scenario 2: A flight is taken by a shareholder or employee for personal purposes on an aircraft used primarily for business purposes in the calendar year
Provided that the aircraft is used “primarily” (generally, more than 50%) for business purposes in the year, the taxable benefit under this scenario will be equal to the price of a charter of an equivalent aircraft for an equivalent flight (including any related dead head flights to return an empty aircraft to or from the home base), such amount to be reasonably split among relevant shareholders or employees. However, in the case of an employee, if an open market charter is not a viable option under the particular circumstances (for example, due to demonstrable security concerns), the taxable benefit will instead be computed based on scenario 1.
Scenario 3: The shareholder or employee uses the aircraft primarily for personal purposes
Where the relative use of the aircraft by the shareholder or employee in the year, either alone or with non-arm’s length persons, is primarily (again, more than 50%) for non-business purposes, the value of the taxable benefit will be equal to the personal use portion of the net annual operating costs (fixed plus variable costs, with an adjustment where the aircraft is also chartered to third parties) in the year plus an imputed available-for-use amount (generally computed as the aircraft cost multiplied by an imputed monthly interest rate). Clearly, this scenario will be far more costly than scenario 2 and predictability will also be an issue. Moreover, while this benefit will generally be determined proportionately to that person’s personal use in the year, where the total business use in the year was only ancillary to an overall personal use then 100% of such amount will be treated as a taxable benefit.
Consequences to the corporation
Where the taxable benefit was incurred on account of being an employee, the operating and capital costs of the aircraft will generally be deductible to the employer provided that such amounts relate to an income-earning purpose and are reasonable. However, where the benefit was instead conferred by virtue of being a shareholder, the personal use portion of such expenses (including capital cost allowance) will not be deductible by the corporation.
As well, in the case of taxable benefits for an employee, appropriate deductions at source will have to be taken. However, this may be difficult to apply in practice as the determination of whether scenario 2 or 3 applies may often be made only in hindsight after the end of the year.
Recommended courses of action
So, what are the takeaways? First, it is important to review your current aircraft usage practices and operating structures with your advisors so as to take any necessary remedial measures to ensure compliance with the new CRA policy. Second, statistics as to business vs. personal uses should be tracked regularly throughout the year so as to avoid inadvertently slipping from scenario 2 into scenario 3. Third, documents supporting business uses of the aircraft should be prepared on a regular basis in case of later audit. Fourth, where scenario 2 applies it is advisable to obtain market charter rates for the particular aircraft from local providers at the start of each year.