Principal Issues: Does the position set out in paragraph 11 of the Interpretation Bulletin IT-432R2 apply to the calculation of a taxable benefit that a shareholder derives from the personal use of an aircraft owned by his/her corporation?
Position: When a shareholder grants an interest-free loan to his/her corporation and the corporation uses the amount to acquire an aircraft that is made available to that shareholder for his/her personal use, the CRA may agree in determining the available-for-use amount that the initial cost of the aircraft is first reduced by the amount of outstanding interest-free loan that the shareholder made to the corporation to enable the corporation to acquire that aircraft. The result must, however, respect the principle enunciated in the Youngman decision.
Reasons: The CRA applies the fundamental principle of valuation of the benefits granted to a shareholder as determined in the case law, particularly in Youngman.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 14
Taxable benefit arising from the use of an aircraft
Interpretation Bulletin IT-160R3 (footnote 1) dealt with the taxation of benefits that shareholders and employees derive from the personal use of an aircraft owned or leased by their company or employer. That Bulletin was archived in 2002 and was canceled on September 30, 2012.
Communiqué AD-18-01 of March 7, 2018 (footnote 2) now provides guidelines for valuing those same benefits.
The Communiqué describes three main scenarios that must be taken into account when calculating the value of the taxable benefit arising from the personal use of an aircraft that a corporation or an employer provides to its shareholders or employees. In short, according to the third scenario (footnote 3), the CRA considers that the shareholder or employee will be considered to have received a taxable benefit equal to his or her personal use portion of the aircraft's operating costs plus an available-for-use amount. According to the CRA, this amount is equal to the original cost of the aircraft multiplied by an imputed monthly interest rate.
In addition, Interpretation Bulletin IT-432R2 (Footnote 4) sets out the CRA's position in various situations where a benefit is conferred on a shareholder. One of the situations provided is where a shareholder grants an interest-free loan to the shareholder’s company and that company uses the money to acquire property that is made available to that shareholder for the shareholder’s personal use.
In paragraph 11 of that Bulletin, the CRA considers that the value of the taxable benefit to a shareholder may be the amount determined by multiplying a normal rate of return times the greater of the cost or fair market value of the property and adding the operating costs related to the property. In applying this formula, the CRA considers that the amount representing the greater of the cost or fair market value of the property may first be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder to enable the corporation to acquire the property.
The CRA position set out in paragraph 11 of Interpretation Bulletin IT-432R2 (footnote 5) is not repeated in Communiqué AD-18-01 dated March 7, 2018 (footnote 6).
Question to the CRA:
Does the position set out in paragraph 11 of Interpretation Bulletin IT-432R2 (footnote 7) apply to the calculation of a taxable benefit that a shareholder derives from the personal use of an aircraft owned by the shareholder’s corporation?
CRA Response:
The fundamental principle of valuing the benefits granted to a shareholder is established in the jurisprudence, in particular, in Youngman v. The Queen (footnote 8), 90 DTC 6322 (FCA). The CRA applies that principle both in Interpretation Bulletin IT-432R2 and in the guidelines in Communiqué AD-18 01. According to this principle, the value of a benefit corresponds to the price that a shareholder would have paid in similar circumstances to receive the same benefit from a corporation of which the shareholder was not a shareholder.
Communiqué AD-18-01 is intended to provide general guidance and is not intended to cover all possible circumstances or situations.
Where a shareholder grants an interest-free loan to the shareholder’s corporation and that corporation uses that amount to acquire an aircraft that is made available to that shareholder for the shareholder’s personal use, the CRA could accept in determining the available-for-use amount that the original cost of the aircraft is first reduced by the amount of the interest-free loan that the shareholder made to the corporation to enable the corporation to acquire that aircraft. The result must, however, respect the principle set out in the Youngman decision (footnote 11).
Anne Dagenais
(613) 670-9050
5 October 2018
2018-076885
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-160R3 CANCELLED “Personal use of aircraft (Archived), 19 February 1992.
2 Communiqué Number: AD-18-01 available on the CRA's webpage titled: “Taxable benefit for the personal use of an aircraft” https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/audit-policies-manuals/taxable-benefit-personal-aircraft.html
3 For a complete description, see the Communiqué.
4 CANADA REVENUE AGENCY, Interpretation Bulletin IT-432R2 ARCHIVED - Benefits Conferred on Shareholders, 10 February 1995.
5 Id.
6 Above, note 2.
7 Above, note 4.
8 90 DTC 6322 (FCA).
9 Above, note 4.
10 Above, note 2.
11 Above, note 8.