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.