Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
(1) Deduction of capital cost allowance and operating expenses by a corporation with respect to a yacht owned jointly by it and the sole-shareholder.
(2) Whether the sole-shareholder is receiving a benefit for personal use of the yacht.
Position:
(1) No deductions permitted by the corporation.
(2) Depends on the facts.
Reasons:
(1) Paragraph 18(1)(l) of the Act and paragraph 1102(1)(f) of the Regulations.
(2) Subsection 15(1) of the Act and paragraph 11 of IT-432R2.
July 31, 2002
Mr. Leonard Fornelli HEADQUARTERS
Verification and Enforcement Division Randy Hewlett, B.Comm.
Ottawa Tax Services Office 613-957-8973
2002-014313
Deductible Expenses and Shareholder Benefits - Yachts
We are writing in response to your inquiry of May 29, 2002, regarding the above-noted issue. You are in the process of auditing a corporation and inquire whether capital cost allowance and operating expenses are deductible with respect to a yacht owned jointly by it and the sole-shareholder. Further, you inquire whether the sole-shareholder of the corporation is receiving a benefit for the personal use of the yacht.
Our understanding of the relevant facts is as follows:
Facts
1. In XXXXXXXXXX, XXXXXXXXXX (the Company) purchased a yacht (the first yacht) for $XXXXXXXXXX.
2. The Company recorded this transaction as a purchase of inventory because it intended to sell the first yacht.
3. Over the XXXXXXXXXX subsequent years, the shareholder of the Company used the first yacht for personal purposes.
4. In XXXXXXXXXX, the Company and the shareholder jointly purchased another yacht (the second yacht) for approximately $XXXXXXXXXX. The Company owns 1/3 of the second yacht, while the shareholder owns 2/3. The Company traded-in the first yacht as partial consideration for its share of the second yacht. The Company capitalized its 1/3 share of the second yacht, $XXXXXXXXXX, in class 10.
5. The Company is in the business of XXXXXXXXXX.
6. The annual yachting season is from mid-June to mid-September. The shareholder uses the second yacht approximately one week during the season. During this time the second yacht is kept at the local marina.
7. In the off-season, the second yacht is stored at the personal residence of the shareholder.
8. There is no external advertising on the second yacht to indicate ownership.
9. XXXXXXXXXX. Further, it also maintains that the second yacht is used approximately 1/3 of the time for entertaining clients, XXXXXXXXXX and for promoting the business of the Company. In the Company's view, capitalizing 1/3 of the cost of the second yacht and deducting 1/3 of the operating costs is reasonable.
10. For the XXXXXXXXXX fiscal period, the Company deducted capital cost allowance of $XXXXXXXXXX and operating expenses of $XXXXXXXXXX related to the second yacht.
11. The Company did not provide documentation as to how its use of the second yacht contributed to total sales.
You inquire if the capital cost allowance and operating expenses for the second yacht are deductible by the Company, and whether the shareholder is receiving a benefit for use of corporate property.
Regardless of whether or not the Company can demonstrate that there is a business purpose with respect to its 1/3 ownership of the second yacht, pursuant to paragraph 18(1)(l) of the Income Tax Act (the Act), it is not entitled to deduct any operating expenses. This provision provides that "no deduction shall be made in respect of ... the use or maintenance of property that is a yacht ... unless the taxpayer made or incurred the outlay or expense in the ordinary course of the taxpayer's business of providing the property for hire or reward". Further, by virtue of paragraph 1102(1)(f) of the Income Tax Regulations (the Regulations), the Company would not be entitled to a deduction under paragraph 20(1)(a) of the Act for capital cost allowance on its 1/3 share of the capital cost of the yacht. This provision in the Regulations provides that "the classes of property described in ... [the Regulations] ... shall be deemed not to include property ... that is property referred to in paragraph 18(1)(l) of the Act". For more information, you may wish to refer to Interpretation Bulletin IT-148R3, Recreational Properties and Club Dues.
With respect to shareholder benefits on the personal use of corporate property, you may wish to consult Interpretation Bulletin IT-432R2, Benefits Conferred on Shareholders. Specifically, paragraph 11 of IT-432R2 indicates that where a corporate property is made available for the personal use of a shareholder, a benefit under subsection 15(1) of the Act is generally considered to have been conferred on the shareholder. The calculation of the amount or value of the benefit is usually based on the fair market rent for the property minus any consideration paid to the corporation by the shareholder for the use of the property.
There may be situations where the fair market rent is not appropriate for measuring the benefit, particularly where it does not provide for a reasonable return on the value or cost of the property (for example, in the case of a luxury residence or yacht made available for the shareholder's personal use). In such a case, an imputed rent would be determined by:
The total of:
? The greater of the cost or fair market value of the property (reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder to enable the corporation to acquire the property), multiplied by a normal rate of return, and
? The operating costs related to the property.
Less
? The consideration paid to the corporation by the shareholder for the use of the property.
In our view, if the facts support that the Company is using the second yacht for business purposes and the shareholder is using it 2/3 of the time (or less) during the yachting season, there is no benefit applicable under subsection 15(1) of the Act. You should consult the Headquarters' Technical Applications and Valuations Division, Compliance Programs Branch, if you require assistance in calculating the amount of any benefit and gathering audit evidence supporting this action.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CCRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We trust our comments are of assistance.
John Oulton, CA
Manager
Individual and Business Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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