Is a corporation carrying on a personal services business ("PSB") entitled to deduct the following under s. 18(1)(p)(ii): (i) the costs of leasing an automobile provided to an incorporated employee; (ii) interest expense on a loan for the purchase of such automobile; and (iii) capital cost allowance thereon? CRA responded:
[T]here is a benefit to an incorporated employee for purposes of subparagraph 18(1)(p)(ii) where a corporation carrying on a PSB leases an automobile that is used by the incorporated employee, in whole or in part, for personal use.
If this benefit is provided to the incorporated employee in the incorporated employee’s capacity as an employee … the cost of the benefit comprises the personal use portion of the automobile lease costs. Consequently, these expenses would be deductible in computing the income of the PSB corporation by virtue of subparagraph 18(1)(p)(ii) to the extent that such leasing costs would otherwise be deductible if the corporation's income were from a business other than a PSB. …
If this benefit is provided to the incorporated employee in the incorporated employee’s capacity as a shareholder, the cost of the benefit is not deductible in computing the income of the PSB corporation … since it would not, if the corporation's income were from a business other than a PSB, be deductible in computing its income.
CRA went on to provide that a similar analysis applied to the interest expense, i.e., if the related benefit was provided to the incorporated employee qua employee, the cost of the benefit comprised the portion of the interest expense relating to the personal use of the automobile, which amount would be deductible in computing the PSB corporation’s income under s. 18(1)(p)(ii) to the extent that such interest expense would otherwise be deductible if the corporation's income were from a business other than a PSB – whereas, in the qua shareholder case, none of the interest expense would be deductible.
Respecting CCA claims, CRA stated:
[A] capital cost allowance amount is not the cost of a benefit …[and] is not deductible in computing the income of a PSB corporation under subparagraph 18(1)(p)(ii). … However … capital cost allowance may be deducted in computing the income of the PSB corporation by virtue of subparagraph 18(1)(p)(iii) where such an amount would otherwise have been deductible by virtue of paragraphs 8(1)(f) and 8(1)(j)(ii), having regard to subsections 8(4), 8(10) and 8(13) … .