Canada: Canada Revenue Agency's Proposed New Policy On Personal Use Of Business Aircraft Takes Flight

Last Updated: September 8 2017
Article by Steven Sitcoff

The Canada Revenue Agency's ("CRA") former administrative policy as regards personal use of corporate-owned business aircraft (as set out in Interpretation Bulletin IT-160R3) was that the shareholder or employee who benefited from such non-business use would generally be assessed a taxable benefit based on the value of equivalent "first-class airfare". The latter position was cancelled on September 30, 2012 and, since then there has been no clearly articulated policy in this regard.  In 2015, the CRA initiated a national audit project targeting this issue.

The CRA has recently prepared a draft policy which it has submitted for comment to the Canadian Business Aviation Association, the Canadian Tax Foundation and the Tax Executives Institute. Unfortunately, this is not being handled as a genuine public consultation as the CRA has declined to clearly outline its position in writing and has not widely disseminated it with a view to seeking commentary from a variety of constituents.  Moreover, given the nature of this process, there is still a good deal of uncertainty about the application and potential impact of the proposed policy.  However, the one thing that is clear is that the CRA has taken an issue that is ostensibly simple and made it needlessly complex.

Most alarmingly, the CRA proposes to apply the new policy retroactively to all open audits, notices of objection and pending litigation in this regard where the years in issue are either not statute-barred or where waivers have otherwise been provided.

The proposed policy centres around three categories of users, which may be summarized as follows:

  • "Mixed use" trips involving a person who does not control access to the aircraft

In this category, an employee or officer of the corporation who does not control access to the aircraft, who is travelling for business purposes and is accompanied by another person travelling for non-business purposes will be assessed a taxable benefit in respect of the travel companion based on the value of a non-discounted "first class" ticket (presumably, business class) to the same destination. This position may be more difficult than appears at first glance, as it is noted that business class tickets are not available to or from all destinations, and some locations may not be accessible by commercial air travel.

  • Personal use of the business aircraft by a person who does not control access to the aircraft

Where the aircraft is used by such a person, whether alone or with other persons, for purely personal purposes, that person will be assessed a taxable benefit equal to the charter rate for the particular type of aircraft and destinations. For example, if the cost of a comparable charter is $100,000, the person would have $100,000 added to their income to be taxed at his or her marginal tax rate.  The problem is that there may not be readily available comparables for charters in the particular market where that individual is located, or for the particular type of aircraft.  More importantly, this position is punitive in nature because it presumes that if the individual did not have access to a business aircraft he or she would have instead chosen to travel for personal purposes on a chartered aircraft rather than on a relatively inexpensive commercial flight.

  • Personal use of the aircraft by a person who controls access and use of the aircraft

This category is of the greatest concern. In this category, the person would be assessed a taxable benefit equal to the sum of the following:

  1. an "operating benefit" equal to the person's proportionate share of the operating costs (i.e. variable plus fixed costs) for the calendar year (excluding capital cost allowance and interest), plus
  2. an "available for use" benefit which assesses the person based on the proportion of his or her personal use (based on flying hours) as applied to the product of the original capital cost of the aircraft multiplied by a prescribed rate of interest. So, for example, if 20 out of 100 total flying hours in the calendar year were for personal use, the original capital cost of the aircraft is $30,000,000 and the prescribed rate of interest is 6%, the available for use benefit to be added to that person's income is $360,000 (i.e. 20% x $30,000,000 x 6%).

There are a number of significant problems with the latter category.   First, there is no basis to arbitrarily distinguish persons in "control" for such prejudicial treatment under this category, especially where the aircraft is being used principally for legitimate business purposes.  Second, the CRA has yet to articulate how "control" is to be determined, and there is concern that CRA auditors will effectively have unfettered discretion in this regard.  Because the threshold criteria for this category to apply is whether the person who enjoys the benefit also controls access and use of the aircraft, it will likely apply to most circumstances involving business aircraft owned by private corporations or closely-held public corporations.  Third, one may note that the Income Tax Act has a statutory standby charge scheme applicable to the use of a corporate automobile by an employee.  However, the formula proposed by the CRA as regards business aircraft is more onerous than that applicable to automobiles, as reduced charges apply to the latter where the employee's personal use does not exceed a monthly minimum or where the automobile is used "primarily" (generally 50% or more) for business.  Finally, the quantification of the taxable benefit is a moving target and can only be determined in hindsight after year-end because it is to be assessed based on the proportion of business to non-business use of the aircraft in the particular year; as a consequence, such individuals may instead choose to take personal flights on a charter or commercial airline so that the cost to them can be determined from the outset. 

The CRA's proposed policy goes beyond tax concerns as it could adversely impact the Canadian business aviation industry as a whole, affecting jobs and Canada's global competitiveness in this sector. It is hoped that the voices of the advocacy groups noted above, as well as other interested parties who will provide comment, will be given proper consideration by the CRA before the consultation period closes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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