For CRA use only. Background

Transcription

1 For CRA use only NUMBER: AD DATE: ISSUED BY: Policy and Technical Working Group International, Large Business and Investigations Branch (ILBIB) and Domestic Compliance Programs Branch (DCPB) SECTIONS AFFECTED: Small and Medium Enterprises, International and Large Business, Scientific Research and Experimental Development, Offshore Compliance and Aggressive Tax Planning, Criminal Investigations, Business Compliance (Collections and Verification Branch) SUBJECT: Taxable benefit for the personal use of an aircraft The purpose of this communiqué is to provide guidance on the valuation of taxable benefits arising from personal use of aircraft owned or leased by a corporation, partnership or sole proprietorship by its shareholders or employees with respect to the Income Tax Act (ITA). The guidance contained in this communiqué is applicable to taxable benefits arising from the personal use of aircraft for T1 individual taxation years commencing after Where the taxpayer concurs, and it is considered reasonable in the circumstances, CRA officials may utilize this guidance for taxation years prior to Background Interpretation Bulletin IT-160R3, Personal use of aircraft, which provided guidance on the taxation of the benefits enjoyed by a shareholder or employee as a result of the personal use of an aircraft, was archived in 2002 and later cancelled on September 30, With the cancellation of IT-160R3, there is a perception that the Canada Revenue Agency (CRA) has changed its administrative policy with respect to valuing taxable benefits related to the personal use of aircraft by shareholders and/or employees, and the deductibility of aircraft costs. The basic principle of valuing these taxable benefits has not changed. The taxable benefit for the personal use of an aircraft provided by a corporation or employer should be determined based on the value of the benefit. The value of the benefit generally corresponds to the amount the shareholder or employee would have paid under similar circumstances to receive the same benefit from an arm s length party for whom the individual is neither a shareholder nor employee.

2 Page 2 This communiqué provides additional guidance in determining what a shareholder or employee would reasonably be expected to pay for the personal use of an aircraft under similar circumstances. These guidelines take into consideration previous technical interpretation and jurisprudence, and outline a reasonable methodology in computing the value of these taxable benefits to shareholders or employees, thus maintaining consistent application within CRA audit programs. However, there may be some situations for which the following guidance may not be applicable. Value of the benefit A taxpayer who uses an aircraft for personal purposes that is either owned directly or indirectly, or leased, by the taxpayer's corporation or employer is considered to have derived a taxable benefit unless the taxpayer pays or reimburses the corporation or employer an amount equal to the fair market value of that benefit. When the personal use aircraft benefit is received or enjoyed on account of shareholdings the value of the benefit is included in income by virtue of subsection 15(1) of the ITA. When the benefit is received or enjoyed on account of employment, the value of the benefit is included in income by virtue of section 5 and paragraph 6(1)(a) of the ITA. In certain situations, subsection 246(1) of the ITA may be considered, for example, in the case of an indirect shareholder. The valuation of the taxable benefit is determined on the basis of what is reasonable in relation to the facts of the case and the manner in which the aircraft is used, whether business or personal. The corporation and/or employer, as well as the individual taxpayer, are required to maintain adequate records, logs or other evidence to substantiate whether instances of aircraft travel, and travel by the passengers on that aircraft, were for business or personal reasons. The fundamental principle in determining the value of a benefit is set out in jurisprudence. In the case of The Queen v Fingold 1, the Federal Court of Appeal concluded that the method for determining the value of the benefit does not depend on the purpose for which a property was acquired but rather the manner in which the property was used. In the case of Youngman v The Queen 2, the Federal Court of Appeal determined that the value of a benefit for purposes of subsection 15(1) of the ITA is the value a shareholder would have had to pay for the same benefit in similar circumstances if he [or she] had not been a shareholder of the company. 3 In determining the value of the taxable benefit to the shareholder or employee, various methods have been applied in the past depending on the facts of the case and what was considered reasonable in the circumstances. This communiqué provides additional guidance and outlines the circumstances under which each method should be applied in 1 The Queen v Fingold, 97 DTC Youngman v The Queen, 90 DTC This principle is also applicable to situations involving employees: Canada v Spence, 2011 FCA 200

3 Page 3 computing the value of the taxable benefit in order to maintain predictability, fairness, neutrality, and consistency in the CRA s approach. Computation methods In computing the value of the taxable benefit arising from the personal use of a corporation s or employer s aircraft 4 by its shareholders and/or employees, there are three main scenarios to consider: 1. Where the shareholder or employee takes a flight 5 on the aircraft in circumstances where there is a business purpose for the flight and their presence on the flight, and there is a personal purpose for others taking the flight, the value of the taxable benefit for the personal use would be equal to the highest priced ticket available in the marketplace for an equivalent commercial flight Where the shareholder or employee takes a flight on the aircraft in circumstances where there is no business purpose for the flight, the value of the taxable benefit would be equal to the price of the charter of an equivalent aircraft for an equivalent flight. 3. Where the shareholder or employee uses the aircraft primarily for personal purposes relative to the aircraft s total use during the calendar year ( primary purpose test ) 7, either alone, or in combination with other persons not dealing at arm s length, the value of the taxable benefit is equal to the personal use portion of the aircraft s operating costs plus an imputed available-for-use amount. Scenario 1 Where a shareholder or employee takes a flight on an aircraft that is owned or leased by a corporation or an employer during the year such that there is a clear business purpose for both the flight and their presence on the flight, generally there is no taxable benefit to the shareholder or employee. Where another shareholder or employee takes the same flight for personal reasons, and is not subject to the primary purpose test (scenario 3 below), that shareholder or employee is considered to have received a taxable benefit equal to the price of the highest priced ticket to the destination, and back to the home location if applicable. 4 This communiqué applies whether the corporation or employer owns or leases the aircraft. 5 Take a flight in the context of this communiqué means the entry of passengers onto an aircraft. It starts with entering the aircraft and ends with the seating of each passenger and closure of the aircraft doors. It also refers to being on the aircraft for the duration of the flight. 6 Referred to as highest priced ticket for purposes of this communiqué. 7 Primary or primarily has the same general meaning as that contained in the ITA.

4 Page 4 The purpose of the shareholder or employee taking the flight is a question of fact. Where, based on the facts and circumstances of the case, the business purpose of the shareholder or employee taking the flight is ancillary to a personal purpose such as an extended vacation, the purpose of the flight may be considered personal in nature and subject to the computation in scenario 2. Separate flights to other destinations for personal purposes that are taken around a business purpose flight will be included in the computation of the taxable benefit in scenario 2. Where the shareholder or employee is accompanied by a family member(s) or friend(s) on the flight, the CRA will generally take the position that the purpose of their taking the flight is personal. An example of this scenario could include a senior executive travelling to Europe for a professional conference with his or her spouse and children. To the extent that it could be demonstrated unequivocally that the family member(s) or friend(s) is taking the flight solely for business purposes, then there is no additional taxable benefit. Where this cannot be demonstrated, the shareholder or employee will be considered to have received a taxable benefit equal to the highest priced ticket for each family member or friend on the flight. The value of these taxable benefits will be included in the income of the shareholder or employee, unless the family member or friend is also a shareholder or employee, in which case the value of the taxable benefits will be included in the income of the family member or friend. Scenario 2 Where a shareholder or employee takes a flight on an aircraft that is owned or leased by a corporation or employer during the year and there is no business purpose to the flight, and the shareholder or employee is not subject to the primary purpose test (scenario 3 below), the shareholder or employee will be considered to have received a taxable benefit equal to the price of a charter of an equivalent aircraft for an equivalent flight that is readily quoted and available on the open market. For example, an executive takes the employer aircraft to Europe for vacation purposes. The open market charter price would include the price to travel to the destination, the price to travel back to the originating location, any incremental fees or charges for the layover period and additional services provided during the flight. The charter price would also include what is referred to as a dead head flight if the aircraft is required to be returned to its home location for a period of time before returning to pick up the passengers of the original flight. Generally, there is an open charter aircraft market and the value of the benefit can be reasonably estimated based on the quoted prices available in the market place. The value of the taxable benefit arising under this scenario where there is no business purpose to the flight will be included in income of the shareholder or employee on the flight. If there is more than one shareholder and/or employee on the flight, then the charter price will be split amongst those shareholders and/or employees.

5 Page 5 The allocation amongst the shareholders and employees on the flight should be reasonable in the circumstances, and may take into consideration the relative number of family members and friends who took the flight. In the case where: an employee takes a flight for personal purposes on an aircraft that is owned or leased by the employer the taxable benefit was conferred on account of employment and an open market charter is not a viable option based on the unique circumstances of the flight, for example there are demonstrable bona fide security concerns for the employee the taxable benefit will be computed pursuant to scenario 1 for that particular flight. These types of cases must be referred to Employer Compliance Audit for review prior to making any final determination. Scenario 3 Where a corporation or employer provides an aircraft to a shareholder or an employee for personal use, and the shareholder or employee uses the aircraft primarily for personal purposes relative to the aircraft s total use during the calendar year, either alone or in combination with other persons not dealing at arm s length, the shareholder or employee will be considered to have received a taxable benefit equal to his or her personal use portion of the aircraft s operating costs plus an available-for-use amount. Under this scenario, the shareholder or employee is considered to have received an economic benefit or advantage from having access to or control over the aircraft. All of the relevant facts and circumstances will be taken into consideration, including any shareholder or employee agreements, in the determination of whether the shareholder or employee had access to or control over the aircraft, and the incremental economic advantage derived from such use, as it relates to the shareholder or employee s personal use and enjoyment of the asset. Generally this economic advantage will be demonstrated when the personal use portion attributable to the shareholder or employee (or to him or her in combination with that attributable to other persons not dealing at arm s length with the shareholder or employee) meets the primary purpose test relative to the total use of the aircraft during the calendar year. For example, if a shareholder or employee uses an aircraft owned by their corporation or employer for personal use 50% or more of its total use, then he or she would be expected to recognize an available-for-use amount in the computation of his or her taxable benefit. The personal use portion of the aircraft attributable to the shareholder or employee, and that attributable to any other persons not dealing at arm s length (who are not shareholders nor employees of the corporation or employer) will be used in computing the particular shareholder or employee s taxable benefit where the primary purpose test

6 Page 6 is met. If the other person(s) not dealing at arm s length is a shareholder or employee of the corporation or employer then the personal use portion attributable to that particular person will be included in computing their income. Where the shareholder or employee is subject to the primary purpose test under this scenario, the value of the taxable benefit to the shareholder or employee is equal to the personal use portion of the aircraft s operating costs plus an available-for-use amount attributable to that particular shareholder or employee. As outlined in the Youngman 8 case, the Courts have supported the fair market value approach in computing the value of the benefit received. 9 In some cases, a method based on the equity cost to the corporation or employer may provide a reasonable approximation of the value of the benefit in certain circumstances. In the case of an aircraft that is owned or leased by the corporation or employer, the operating costs of the aircraft plus an imputed available-for-use amount may provide a reasonable determination of the value of the benefit under this scenario. Operating costs would include all variable and fixed costs incurred/accrued in operating the aircraft during the year. To the extent that the corporation or taxpayer maintains a taxation year-end other than December 31 st ; these operating costs should be reasonably estimated on a calendar year basis. Most medium to large businesses maintain detailed records such that the variable and fixed costs are expensed/accrued on a monthly basis. Depreciation, capital cost allowance, leasing costs and carrying charges will be excluded in the operating cost benefit as these costs are taken into consideration in computing the available-for-use amount. In addition to the operating cost benefit, there is also a benefit to the shareholder or employee from having access to or control over the aircraft, for example has control over the manner in which the aircraft is used. The available-for-use amount is equivalent to an imputed lease amount or equity rate of return on the original cost of the aircraft that is made available to the shareholder or employee for the specified period of time in the year. The available-for-use amount is equal to the original cost of the aircraft multiplied by an imputed monthly interest rate. In order to simplify the calculation, an annualized interest rate based on the prescribed interest rates contained in paragraph 4301(a) of the Income Tax Regulations may be used to approximate an imputed equity rate of return for the calculation. To the extent the aircraft is leased and not capitalized for tax purposes, the available-for-use benefit will be based on the monthly leasing costs incurred/accrued (rather than the original cost multiplied by an imputed interest rate). 8 Youngman v The Queen, 90 DTC 6322: In determining the value of benefit, one may take its cost into consideration. Free market value is not, in all circumstances, the sole indication of real value. 9 For situations involving employees, see Anthony v The Queen, 2010 DTC 533 (at para. 54), accepted by the Federal Court of Appeal.

7 Page 7 The operating benefit and the available-for-use amount are then computed by multiplying the respective costs by the personal use portion relative to the total use portion based on the aircraft log book and other relevant records that outline the flights taken, flying hours, and passengers on the flights. Generally, the relative percentage, and the taxable benefit, will be based on the flying hours attributable to the particular shareholder or employee (and those personal use flying hours attributable to persons not dealing at arm s length that are not shareholders nor employees). However, to the extent that the total business use of the aircraft was ancillary to the personal use of the aircraft during the year, the aircraft may be considered to have been used 100% for personal purposes by a shareholder(s) or employee(s). This would also be the case where an aircraft is made available-for-use other than in connection with the employee s employment duties. In the case where the shareholder or employee is subject to the primary purpose test under this scenario, and takes a flight that would otherwise fall under either the highest priced ticket or charter price scenarios, the particular flight and related flying hours would be included in the total personal use hours under this scenario. Finally, where the corporation or employer operates numerous private aircraft, the total personal use across all of the aircraft by a particular taxpayer in comparison to the average total use across all of the aircraft may be considered in determining whether the primary purpose test was met. If so, then the taxpayer may be subject to the scenario 3 rather than scenario 2 using the average cost across all of the aircraft that are reasonable in the circumstances. Taxable benefit inclusion The value of the taxable benefits arising under any of these scenarios will be computed on a calendar basis and included in the shareholder or employee s income, reduced by the amount paid as a reimbursement to the corporation, employer or related party for personal use of an aircraft within the calendar year, or 45 days immediately following the year. In the case of an employee, these non-reimbursed taxable benefits are required to be included in the employee s T4, Statement of Remuneration Paid and the employer s T4 Summary. Cases involving employer non-compliance in the reporting and remittance of employer withholding taxes on personal use of aircraft should be referred to Employer Compliance Audit. Shareholder versus employee As in the case of other taxable benefits, if the individual on whom the aircraft taxable benefit has been conferred/received is both a shareholder and an employee of the corporation, a determination must be made, taking into consideration all of the relevant facts and circumstances of the particular case, as to whether the benefit was conferred by the corporation on the person as a shareholder and is therefore taxable under subsection 15(1) of the ITA, or instead was conferred on the person as an employee

8 Page 8 and taxable under section 5 and paragraph 6(1)(a) of the ITA. This determination should be clearly documented in the case, and when the benefit was conferred or received on account of employment, consideration should be given to referring the case to Employer Compliance Audit. Deductible expenses In general, subsection 9(1) of the ITA allows a corporation or business to deduct expenses incurred in order to earn business or property income. However, these expenses must be reasonable in the circumstances pursuant to section 67 of the ITA. In addition, paragraph 18(1)(a) of the ITA prohibits a corporation or business from deducting expenses except to the extent that they were made or incurred by the taxpayer for the purpose of gaining or producing income from business or property. Where the benefit was conferred on account of shareholdings, the personal use portion of the aircraft s operating expenses and capital cost expenses will be denied to the corporation, or related entity that incurred the expenditures, by virtue of paragraph 18(1)(a) of the ITA. To the extent that the benefit was conferred on account of employment, the operating and capital costs of the aircraft will generally be deductible to the employer. It is a question of fact whether the taxable benefit from the personal use of an aircraft was conferred on the individual on account of shareholdings or on account of employment. In summary, under subsection 9(1), paragraph 18(1)(a) and section 67 of the ITA, expenses incurred by a corporation are deductible only if incurred to earn income from business or property and are reasonable under the circumstances. Therefore, expenses related to the personal use of the aircraft by the shareholder are not deductible to the corporation. Expenses related to the personal use of the aircraft by employees are generally deductible if it can be demonstrated that they were incurred to earn income from business or property and are reasonable. Finally, to the extent that the aircraft is made available in the charter flight market to third parties when not used in the regular operations of the corporation or business, nor for personal use by any of its shareholders and/or employees, the incremental charter income will either be taken into income or offset against the operating costs of the aircraft. If the charter flight market income is applied to partially offset aircraft operating expenses to the corporation or employer, then the net expenses of the aircraft and net flying hours (total hours less charter flight market hours) may be used as the base for computing the operating benefit amount. If there is no netting of charter flight income against aircraft operating expenses then the gross aircraft expenses and total flying hours (charter flight market hours will be considered non personal use flying hours) will be included as the base for computing the operating benefit amount. However, if a shareholder or employee took one of these charter flights for personal purposes, then

9 Page 9 the flight and related flying hours will be included in their personal use flying hours, and in the calculation of the particular shareholder or employee s taxable benefit under one of the three scenarios. For the available-for-use amount there is no netting of expenses or flying hours. The charter flight market hours will be included in the total flying hours for the year but not in the personal use portion unless the shareholder or employee took the charter flight for personal purposes, in which case the hours will be included in the personal use flying hours attributable to that particular shareholder or employee. Capital cost allowance (CCA) In accordance with paragraphs 13(7)(c) and (d) of the ITA, the capital cost of the property must be distributed annually between its use for earning income and its use for other purposes. Consequently, when the property is used for business purposes and personal purposes, the CCA may only be determined using the proportion of the capital costs related the use of the property for earning income. Please direct any questions relating to this communiqué to your functional program contact at Headquarters. Original signed by Alexandra MacLean A/Director General, International and Large Business Directorate International, Large Business and Investigations Branch Jennifer Ryan A/Director General, Small and Medium Enterprises Directorate Domestic Compliance Programs Branch Kevin McKenzie Director General, Business Compliance Directorate Collections and Verification Branch Circulate to: Regional Directors of Programs Assistant Directors of Audit Assistant Directors, Collections and Verification Directors General, GST/HST Directorate, Scientific Research and Experimental Development Directorate, Offshore and Aggressive Tax Planning Directorate, and Criminal Investigations Directorate