Principal Issues: Can a PSB deduct under 18(1)(p)(ii) the following amounts: the rental fees for an automobile provided to an incorporated employee; the interests paid with respect to a loan made to purchase an automobile provided to an incorporated employee; a capital cost allowance for an automobile provided to an incorporated employee?
Position: 1) In a situation where the automobile provides a benefit as an employee, we are of the opinion that the cost of this benefit could include, in part or in whole, the cost of the automobile lease expenses for the purposes of subparagraph 18(1)(p)(ii). 2) In a situation where the automobile provides a benefit as an employee, we are of the opinion that the cost of this benefit could include, in part or in whole, the interest fees for the acquisition of the automobile for the purposes of subparagraph 18(1)(p)(ii). 3) We are of the opinion that the capital cost allowance cannot be deductible under subparagraph 18(1)(p)(ii).
Reasons: Wording of the Act.
XXXXXXXXXX 2013-049030 I. Landry, M. Fisc. March 9, 2020
Dear Sir,
Subject: Application of subparagraph 18(1)(p)(ii) of the Income Tax Act
This is further to Mr. XXXXXXXXXX's letter to us asking whether a corporation carrying on a personal services business ("PSB"), as that term is defined in subsection 125(7), can deduct pursuant to subparagraph 18(1)(p)(ii) of the Income Tax Act (the "Act") the following amounts:
1. the costs of leasing an automobile provided to an incorporated employee;
2. interest expense on a loan for the purchase of an automobile provided to an incorporated employee;
3. depreciation in respect of an automobile provided to an incorporated employee.
Mr. XXXXXXXXXX asked us to answer you directly.
All legislative references in this letter are to the provisions of the Act.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Your question relates specifically to the exception in subparagraph 18(1)(p)(ii). Section 18 reads in part as follows:
“18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
[…]
(p) an outlay or expense to the extent that it was made or incurred by a corporation in a taxation year for the purpose of gaining or producing income from a personal services business, other than
[…]
(ii) the cost to the corporation of any benefit or allowance provided to an incorporated employee in the year,
(iii) any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation if the amount would have been deductible in computing the income of an incorporated employee for a taxation year from an office or employment if the amount had been expended by the incorporated employee under a contract of employment that required the employee to pay the amount,
[…]
that would, if the income of the corporation were from a business other than a personal services business, be deductible in computing its income;”
[Our emphasis]
Where a corporation carries on a PSB, paragraph 18(1)(p) restricts the expenses that may be deducted in computing its income. Under paragraph 18(1)(p), no expenses are deductible in computing the income of a corporation that carries on a PSB, except for expenses specifically provided for in subparagraphs 18(1)(p)(i) to (iv). However, such expenses will be deductible only to the extent that they would, if the corporation's income were from a business other than a PSB, be deductible in computing its income. Consequently, sections 18, 67 and 67.1 to 67.6, among others, must be considered in determining whether an expense may be deducted in computing the income of a PSB.
In considering the wording of subparagraph 18(1)(p)(ii), it is our view that in a specific situation where there is no benefit to an incorporated employee, the corporation carrying on a PSB will not be entitled to a deduction under that subparagraph for that specific situation. Determining in a specific situation whether or not there is a benefit conferred on an incorporated employee is, however, a question of fact that cannot be resolved without an examination of all the facts of that situation.
As a general comment, we wish to mention that the term "cost" is not defined in the Act. For the purposes of subparagraph 18(1)(p)(ii), it is our view that the term should be given its ordinary meaning. Thus, the amount deductible by a PSB corporation under this subparagraph will be the cost of providing the benefit to an incorporated shareholder. Depending on the facts, the value of the benefit to an incorporated shareholder may be different from the cost to the corporation of that benefit. In such a case, it is the cost and not the value of the benefit that should be taken into account for the purposes of subparagraph 18(1)(p)(ii).
Automobile Leasing Expenses
We are of the view that there 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, it is our position that 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. For this purpose, the car rental expenses would be required to have been incurred for the purpose of earning business income. The deduction would also be limited by other provisions of the Act, including sections 67 and 67.3.
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 by virtue of subparagraph 18(1)(p)(ii). In particular, the cost of this benefit would not deductible in computing its income since it would not, if the corporation's income were from a business other than a PSB, be deductible in computing its income.
Where a corporation carrying on a PSB leases an automobile and an incorporated employee uses it solely for business purposes, we are of the view that there is not a benefit to that shareholder. In this case, therefore, no amount would be deductible in computing the income of the PSB corporation under subparagraph 18(1)(p)(ii) in respect of those automobile leasing costs.
Interest expense related to an automobile purchase loan
We are of the view that the same analysis applies to the interest costs associated with borrowing money used to purchase an automobile as in the case of the costs of leasing an automobile. Indeed, we are of the view that there is a benefit to the incorporated employee where a PSB corporation purchases an automobile that the incorporated employee uses, 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, it is our view that the cost of the benefit comprises the portion of the interest expense for the acquisition of the automobile that relates to the personal use of the automobile. Consequently, such expenses would be deductible in computing the income of the PSB corporation under subparagraph 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. To this end, the interest expense would be required to have been incurred for the purpose of earning income from a business and to have satisfied the conditions for the application of paragraph 20(1)(c). The deduction would also be limited by other provisions of the Act, including sections 67 and 67.2.
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 by virtue of subparagraph 18(1)(p)(ii). This is because the cost of the benefit is not deductible in computing the its income since it would not, if the corporation's income were from a business other than a personal services business, be deductible in computing its income. Where a PSB corporation purchases an automobile and the incorporated employee uses it solely for business purposes, we are of the view that there is no benefit to that shareholder. In such case, no amount would be deductible in computing the income of the PSB corporation by virtue of subparagraph 18(1)(p)(ii) in respect of the interest expense related to the acquisition of the automobile.
Capital cost allowance
In our view, a capital cost allowance amount is not the cost of a benefit. Therefore, a capital cost allowance amount is not deductible in computing the income of a PSB corporation under subparagraph 18(1)(p)(ii). This conclusion is in line with that of the Tax Court of Canada in 758997 Alberta Ltd. v. the Queen. (footnote 1) However, capital cost allowance may, depending on the circumstances, be deducted in computing the income of a PSB corporation under subparagraph 18(1)(p)(iii). The wording of subparagraph 18(1)(p)(iii) allows a deduction in computing the income of a PSB corporation for any amount expended by the corporation in connection with the selling of property or the negotiating of contracts by the corporation where, among other things, the amount would have been deductible in computing the income of an incorporated employee had it been expended under a contract of employment that required the employee to pay the amount. Consequently, 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), and the deduction satisfies all other provisions of the Act, including section 67.
We hope that our comments are of assistance.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 758997 Alberta Ltd v. the Queen, 2004 CCI 755.