The Canada Revenue Agency (“CRA”) has changed its administrative policy in respect of how it determines the value of the taxable benefit for personal use of a company owned aircraft. Taxpayers can be reassured that there has been no change to the actual law. Companies that reasonably applied the law to their particular circumstances, rather than the CRA’s previous administrative policy, should be on solid ground with the Minister of National Revenue.
By way of back ground, there have been two distinct administrative policies from the CRA on this issue over the last 25 years.
CRA’s Former Administrative Policy 1992-2012
On February 19, 1992 the CRA published Interpretation Bulletin IT-160R3. The bulletin stated that an aircraft owned, or leased, primarily for business purposes, which is used personally, from time to time, by a taxpayer who is a shareholder, officer, director or employee of the owner of the aircraft shall have the following taxable benefit included in their income:
- the value of a first-class airfare on a regularly scheduled flight to the same destination as the trip flown by the aircraft.
Where this deemed value was unreasonably low due to extensive personal use (friends and/or family accompany the taxpayer or the taxpayer used 1/3 or more the hours flown on the aircraft in a particular tax year) the CRA required the following:
- the person receiving the benefit was required to report the annual fixed and variable operating costs, in proportion to their personal use of the aircraft, based on the relative number of flying hours in the year, plus GST as a taxable benefit; plus
- the portion of the capital cost allowance (“CCA”) claimed by the aircraft owner in the year attributable to the personal use of the aircraft.
On September 30, 2012 the CRA cancelled IT-160R3 but did not replace it leaving taxpayers to devise their own strategies for determining the actual value of the taxable benefit until March 3, 2015.
CRA’s Current Administrative Policy 2015-Present
On March 3, 2015 the CRA published Technical Interpretation 2014-0527A41I7 (the “2015 TI”) offering taxpayers some guidance on how to account for the personal use of a company owned aircraft. In the 2015 TI the CRA suggests the following:
- The administrative policy identified in IT-160R3 will only be accepted by the CRA for tax years prior to the cancellation of IT-160R3 (i.e. before September 30, 2012); and
- the value of the taxable benefit must now be based upon its fair market value. The CRA does not explicitly state how to determine the fair market value of the benefit, but does suggest that the relative operating and ownership costs attributable to the personal use provide a reasonable guideline; and
- the aircraft owner will not be permitted to deduct expenses related to the personal use of its aircraft.
The guiding principle for attributing fair market value of a particular benefit is found in s.69 of the Tax Act and the judicial consideration of that section by the applicable Canadian courts. Questions of fair market value determinations are always fraught with a degree of uncertainty and the CRA refers taxpayers to two tax cases for guidance. The first, is a decision of the Tax Court of Canada in Woods, 85 DTC 479, in which 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…”
The second case is Youngman, 90 DTC 6322, in which the Federal Court of Appeal wrote:
“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.”
The cost to charter an equivalent aircraft on the same mission, on the same date based on an arm’s length commercial rate may provide a degree of certainty for the taxpayer when determining the fair market value of the benefit. Additionally, a well reasoned and documented internal company policy informed by a tax opinion from a qualified Canadian tax lawyer is recommended to substantiate the valuation. Such an approach is prudent for both the person providing the benefit and the individual receiving it.
Finally, aircraft owners are reminded to consider s.1100(15) of the Income Tax Regulations which bars the deduction of capital cost allowance where the capital asset is deemed to be a leasing property. Where the use of the CCA is desired, care should be taken to ensure that the structure used to provide the benefit to the personal user does not prohibit the use of the CCA.
The foregoing is for general information purposes only and taxpayers are encouraged to obtain proper legal advice in respect of their particular circumstances from their own legal advisors.
Jamieson Collins is a Canadian tax and business lawyer and may be reached at +1 647 328-5112 or via email at jdc@jcollins-law.com.
Jamieson Collins & Company 