Principal Issues: How to calculate the taxable benefit to be included in the income of an employee / shareholder who uses the corporation's aircraft for personal purposes.
Position: See response.
Reasons: The answer is based on Interpretation Bulletin IT-160R3
XXXXXXXXXX 2011-040539
September 29, 2011
Dear Madam,
Subject: Personal use of an aircraft
This is in response to your letter of April 18, 2011 in which you requested our opinion on matters relating to the personal-use of an aircraft by an employee or shareholder of a corporation to which the aircraft belongs.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
In particular, you described the following two situations for which you wish our comments:
(1) The corporation's aircraft makes a commercial flight on which seats are still available. An employee or shareholder takes a seat for personal purposes.
(2) The founder-president of the corporation uses the corporation's aircraft for personal purposes, including for a return trip to Florida.
For the purposes of this letter, we have assumed that the founder-president of the corporation is the majority shareholder of the corporation.
You specified that the use of the aircraft for a particular year is generally broken down as follows:
- XXXXXXXXXX% for charter purposes;
- XXXXXXXXXX% for corporate purposes; and
- XXXXXXXXXX% for personal purposes.
In addition to the questions above, you would like to know our opinion on the deductibility of the expenses of a flight for personal purposes by the shareholder who controls the corporation, and who is also employed. Finally, you would like clarification on the requirement for the production of supporting documentation by employees and shareholders who use the aircraft.
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, it is not the practice of the Directorate to comment on proposed transactions that relate to specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you.
(1) As stated in paragraph 6 of Interpretation Bulletin IT-160R3, Personal Use of Aircraft (the "Bulletin"), if an aircraft which is owned or leased primarily for business purposes makes a flight for business reasons and an employee or shareholder occupies available space on the aircraft for personal reasons, the employee or shareholder derives a taxable benefit from the flight. In such a case, the value of the benefit which must be included in the income of the employee or shareholder is normally the equivalent regular commercial economy airfare for a regularly scheduled flight to the same destination.
For flights to Montreal, you indicated that the price charged by the corporation to its customers to board a corporate flight is XXXXXXXXXX.
In this case, we are of the view that the price that you charge your customers can be used as the basis for calculating the taxable benefit to be included in computing the income of your employees to the extent that:
- anyone, not just the corporation's employees or shareholders - can reserve a seat on the corporation's aircraft for $XXXXXXXXXX; and
- The price of $XXXXXXXXXX represents the price of a regular commercial economy airfare for a regularly scheduled flight to Montreal.
(2) When an aircraft is owned or leased primarily for business purposes and it makes a flight the main purpose of which is to provide free or subsidized transportation for the personal benefit of one or more employees or shareholders, the value of the resulting benefit is included in computing the income of the employee or shareholder.
In your situation, the founder-president of the corporation - who is also the majority shareholder of the corporation - used the aircraft for personal purposes. Before deciding how to calculate the benefit the founder-president received, it is necessary to establish whether the founder-president received the benefit as an employee of the corporation or as a shareholder.
Paragraph 9 of the Bulletin states that a benefit to a shareholder who is at the same time an employee is generally considered to be derived from the fact that the individual is a shareholder and is generally taxable as a shareholder's benefit under subsection 15(1) if the following conditions are satisfied:
(a) the shareholder-employee controls the corporation or is one of a related group that controls the corporation or any affiliated corporation, and
(b) there is extensive use of the aircraft for personal purposes by the shareholder-employee or, because of the latter's position, by relatives or friends of the shareholder-employee.
Where one of the above two conditions is not satisfied, the value of the benefit from personal use of the employer's aircraft is considered to be derived by virtue of employment.
Thus, in your situation, we are of the view that the benefit arising from the person's use of the aircraft by the corporation's founder-president should be based on the price of a regular first class ticket for a scheduled flight to the same destination, as the founder-president received the benefit as an employee of the corporation.
In response to your question regarding the deductibility of expenses of a flight incurred for the personal purposes of a shareholder's personal-purpose flight, and in light of the fact that the benefit is conferred on the founder-president as an employee, we note that, generally, an employer may deduct reasonable expenses incurred in transporting an employee by aircraft, whether for business or personal purposes.
With respect to the supporting documents that must be retained by the employees or shareholders of the corporation using the aircraft, it is important to record the details of each flight, including the duration of the flight, its date and its destination, and the purpose for which the employee or shareholder used the aircraft.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate