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Under section 230 of the Income Tax Act (“ITA”) and section 286 of the Excise Tax Act (“ETA”) all taxpayers must keep records that are adequate to determine the amount of taxes owing. When these sections are complied with and a taxpayer maintains adequate records, the Canada Revenue Agency (“CRA”) will generally rely on those records when conducting an audit to determine the taxpayer’s tax obligations. However, if a taxpayer does not maintain adequate records, the CRA can use alternative assessment methodologies to assess a taxpayer under subsection 152(7) of the ITA and subsection 299(1) of the ETA.

In the recent decision of Truong v. Canada, 2018 FCA 6 (“Truong”), the Federal Court of Canada (“FCA”) confirmed that alternative assessment methodologies are permissible when the CRA is unable to audit a taxpayer using the traditional method.

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In a recent blog, we introduced the ongoing tax saga of Tony and Helen Samaroo, a husband and wife that owned and operated a restaurant, a nightclub and a motel, who were charged with 21 counts of tax evasion.

The Samaroos were acquitted of all charges in a 2010 criminal trial where the trial judge found the Crown’s case “weak” and supported by “unreliable” and “highly uncertain” evidence which contained “significant flaws” and “discrepancies”.

Following their acquittals, the Samaroos sued the prosecutor and CRA for malicious prosecution. The claim against the prosecutor was dismissed; however, in a scathing 70 page decision Justice Punnett of the British Columbia Supreme Court found the CRA guilty of malicious prosecution and ordered the CRA to pay approximately $1.7 million in damages to the Samaroos.

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In Canada, most financial services are exempt from tax under the Excise Tax Act (“ETA”). This means that financial institutions cannot charge GST/HST and cannot claim input tax credits (“ITCs”) to recover the GST/HST that they have paid to provide these exempt financial services.

The inability to claim ITCs could incentivize financial institutions to purchase goods and services in non-harmonized provinces (where only the 5% GST would normally apply) to the detriment of harmonized provinces. To prevent this from happening the ETA and the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations(“SLFI Regulations”) outline special attribution method rules (the “SAM rules”) under which Selected Listed Financial Institutions (“SLFIs”) must determine their provincial HST component based on where they supply the exempt financial services rather than where they purchase their inputs. In this context, net tax is calculated using “attribution percentages” that are based on the type of financial institution.

The Federal Court of Appeal (“FCA”) recently dealt with these complex SAM Rules in Farm Credit Canada v. Canada, 2017 FCA 244. In this case, the Appellant was a federal Crown corporation that provided specialized financial services to the farming industry. Unlike most of its private financial institution competitors, the Appellant did not accept or fund its loans from public deposits. 

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When a corporation finds itself in the midst of huge potential tax liability, that is often not the end of the story for the various parties involved. Directors may find themselves pursued for civil director’s liability for any taxes, interest or penalties remaining unpaid by the corporation, and directors, officers, employees and other involved parties may also find themselves being pursued by the CRA for possible criminal offences, and being charged criminally pursuant to section 327(1)(c) of the Excise Tax Act (the “ETA”). Criminal charges will generally follow any situation where the CRA is of the view that the corporation by dishonest means, sought to evade payment or remittance of the GST/HST and/or repurposed the funds to serve its own uses. In these instances, the CRA will be looking to the operating minds of the corporation, and any other persons (e.g., directors, officers, employees, agents, aiding and abetting parties) having a hand in the criminal activities (the “Underlying Parties”).

If convicted, the Underlying Parties are subject to their own fines, and could also face both a fine and imprisonment.

While the CRA often has a very low threshold for what it considers “criminal activity”, a recent Nova Scotia Provincial Court (the “NSPC”) decision appears to confirm that a person’s “suspicious conduct” alone may be insufficient to ground a criminal conviction for “tax evasion”.

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When an aircraft that is owned by a corporation primarily for business purposes is used by an employee or shareholder for personal purposes, the resulting benefit is taxable and must be included in computing the income of the employee or shareholder.

Over the past few years the Canada Revenue Agency (“CRA”) has been increasingly auditing not only the owners of corporate aircraft, but also their employees and shareholders for the GST/HST and income tax treatment of the personal use of corporate aircraft. Many of these audits have resulted in reassessments under which the CRA has assessed or increased the taxable benefits attributable to the employees and shareholders while also deducting a corresponding portion of operating expenses and denying input tax credits to the corporation.

The CRA’s policy on the taxation of corporate aircraft used for personal purposes used to be clearly outlined in interpretive bulletin IT160R3. Under IT160R3, the applicable taxable benefit was generally assessed at the cost of a first class airline ticket for a regularly scheduled flight to the same destination.

That said, since IT160R3 was cancelled on September 30, 2012, the CRA has not yet finalized a clearly articulated policy on the personal use of corporate aircraft. A draft CRA interpretation has however been released which if adopted would dramatically change the way that these taxable benefits have historically been calculated.

Under the new proposed CRA interpretation, where an employee or shareholder of a corporation can control access and use of the corporate aircraft for personal use, the applicable taxable benefit to the employee or shareholder would be calculated as the sum of an attributable “Operating Benefit” and an “Available For Use Benefit” as follows:

  • Operating Benefit: Proportionate share of the calendar year operating costs (i.e. variable & fixed costs) of an aircraft (excluding depreciation, capital cost allowance & interest); plus
  • Available For Use Benefit: Pro-rated share of the original capital cost of the aircraft based on a prescribed rate of interest and the number of flying hours for personal use versus the number of flying hours for business use during the calendar year.

Since this new draft interpretation was released the Canadian Business Aviation Association (“CBAA”) has been in talks with the CRA to address its concerns over the new proposed CRA interpretation. To illustrate the potential impact of the new interpretation, the CBAA has used theexample of an aircraft with an original capital cost of $30 million, annual operating costs of $1 million, and a 6% prescribed rate of interest, that is flown for 80 hours of business use and 20 hours of personal use by a single employee or shareholder. 

Under the CRA’s new proposed interpretation a total of $560,000 would need to be included in the income of the employee or shareholder as a taxable benefit: 20% of $1,000,000 ($200,000) plus 20% of 6% of $30,000,000 ($360,000).

Under this hypothetical scenario, no corporate deduction would be available for the available for the “Available For Use Benefit” portion which is meant to approximate the opportunity cost to the corporation of the capital used to purchase the aircraft, which the CRA believes is a personal benefit to the employee or shareholder. The “Operating Benefit” portion on the other hand should be deductible in the hands of the corporation to the extent that an employee receives the benefit as part of their employment agreement with the corporation. However, this “Operating Benefit” portion would likely not be deductible where it is received by an individual in his/her capacity as a shareholder.

While the CRA’s proposed interpretation has not yet been finalized, this proposal appears to have already spooked the corporate aircraft industry. In fact, the CBAA has estimated that uncertainty surrounding the taxation of the personal use of corporate aircraft has led to between $300-500 million in new corporate aircraft purchases being put on hold.

On the substantive application of income taxes and the GST to these situation, the CRA’s aggressive auditing in this area has yet to be fully tested in the courts, and there is substantial reason to believe that it is far too aggressive in the circumstances.


Have you been audited by the CRA for corporate aircraft use
? If so contact us here.

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