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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1 ) Is the cost of the heli-skiing trip deductible by the company including company airplane costs?
2 ) Did the shareholder receive an employment benefit or a shareholder benefit?
Position:
1 ) No 2 ) Not enough information provided
Reasons:
1 ) Cost of airplane is not deductible as confirmed by Supreme Court of Canada in Sie-Mac case
2 ) An analysis needs to be done to determine whether the plane is extensively used by the shareholder employee.
November 6, 2000
XXXXXXXXXX Tax Services HEADQUARTERS
Cornelis Rystenbil, CGA
Attention: XXXXXXXXXX (613) 957-2060
2000-005042
Private Aircraft
This is in response to your request of October 5, 2000. You requested our comments on whether the use of a company aircraft by a shareholder/employee is considered to be an employment benefit or a shareholder benefit.
You had indicated that the individual in question is the majority shareholder ("Mr. X") of a Canadian-controlled private corporation. The aircraft was used to fly Mr. X, his family and several business associates to a ski lodge in Western Canada where they went heli-skiing. Mr. X, as per his employment contract, has the right to use the jet for business and personal purposes. You also indicated during our telephone conversation on October 25, 2000, (XXXXXXXXXX/Rystenbil) that Mr. X also uses the aircraft to fly his family and a nanny to XXXXXXXXXX and perhaps also to go skiing in XXXXXXXXXX. You intend to disallow all expenses related to the heli-skiing trip under paragraph 18(1)(l) of the Income Tax Act (the "Act") in the corporation. You have indicated that you believe that the Supreme Court of Canada decision in Sie-Mac Pipeline Contractors Ltd. v. R. (93 DTC 5158) supports your position.
The company's position with respect to the heli-skiing trip is that since the use of the aircraft is part of the shareholder's employment contract and was used to entertain business associates on this trip, that the Canada Customs and Revenue Agency (CCRA) should only assess an employment benefit under paragraph 6(1)(a) of the Act to the shareholder for his portion only and not the heli-skiing expenses incurred to entertain the business associates. In addition, it is their position that paragraph 18(1)(l) of the Act would not be applied to the expenses incurred related to the company aircraft.
Inter alia, the provisions of paragraph 18(1)(l) of the Act deny the deduction of expenses incurred for the use of property that is a yacht, a camp, a lodge or golf course or facility. However, the CCRA's position is that where such a property is used for genuine business purposes, which purposes do not include entertainment or recreation of clients, suppliers, shareholders or employees, the CCRA will not consider that the related expenses, provided
they are reasonable, fall within the provisions of paragraph 18(1)(l) of the Act. Nevertheless, no deduction is available where some business meetings may be involved but the main activity is recreation or entertainment.
The word "lodge" is not defined in the Act. However, the CCRA considers the word "lodge", for this purpose, to mean an inn or resort hotel, particularly one that is a centre for recreational activities, as well a dwelling occupied on a seasonal basis in connection with particular activities, such as hunting, fishing, or heli-skiing. This is consistent with its ordinary meaning as found in the Eighth Edition of the Concise Oxford Dictionary where it defines the word "lodge" in part as "...any large house or hotel especially in a resort..." and it defines "resort" as "...a place frequented especially for holidays or for a specified purpose or quality (seaside resort, health resort)...". The determination of whether a particular inn or resort hotel is a lodge would require an examination of all facts and other relevant information. The factors that would be looked at would include the location of the hotel, whether it is operated on a seasonal or year round basis, the type of facilities offered and whether the facilities offered are the primary, secondary or incidental focus of the hotel. Based on the information provided, you appear to have determined that the activities were held at a lodge and that they were mainly personal in nature.
In the Sie-Mac case, the Federal Court of Appeal (92 DTC 6461), whose decision was later confirmed by the Supreme Court of Canada, stated the following:
"It was also argued by the Respondent, in the alternative, that if all the costs were not deductible at least some of them might be. He suggested that the expense associated with the 'use' of rooms at the lodge might be forbidden, but the other costs such as food, transportation, etc. might be deducted. In my view, there is no merit in this contention. None of the costs incurred are deductible in this case. Had the customers been taken to dinner in Edmonton to discuss business the costs would have been deductible; if they had been flown to Vancouver, for a meeting at a hotel, those expenses too would have been allowable; however, the expense of flying up to a lodge for three days, even for a business purpose, is expressly made non-deductible. This was the very kind of thing the subparagraph was meant to stop."
In our view, the Sie-Mac case supports your contention that all expenses related to the heli-skiing at the lodge, including the aircraft expenses, are not deductible as per paragraph 18(1)(l) of the Act.
Interpretation Bulletin IT-160R3, Personal use of aircraft, discusses the taxation of benefits enjoyed by shareholders and employees from personal use of aircraft owned or leased by their corporation or employer. Whether Mr. X received an employment benefit under paragraph 6(1)(a) of the Act or a shareholder benefit under subsection 15(1) of the Act is a question of fact. IT-160R3 provides guidance on this situation in paragraphs 9 to 11. The benefit to a shareholder-employee is generally considered to be derived in his or her capacity as shareholder and is taxable as a shareholder's benefit under subsection 15(1) if:
(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.
What constitutes "extensive use", for purposes of paragraphs 9 and 10 of IT-160R3, depends on the facts and circumstances in each case. As a general guideline, personal use amounting to one-third of the total flying time will be regarded as "extensive." In our opinion, with respect to the issue of employee benefit versus shareholder benefit, very little significance should be placed on the fact that Mr. X's employment contract states that he has a right to use the aircraft for business and personal purposes. IT-160R3 has already provided some very generous guidelines with respect to this determination and the CCRA should adhere to them.
Based on the information provided, Mr. X is the majority shareholder of the corporation. As a result, he has met the condition as described in (a) above. With regard to condition (b), an analysis needs to be done to determine whether Mr. X made extensive use of the aircraft. Once this analysis has been done, a determination can be made as to whether Mr. X received an employment or shareholder benefit. The appendix to IT-160R3 provides an overview of the treatment of aircraft benefits from both the shareholder-employee and company perspective.
Finally, with respect to your question regarding the computation of the shareholder-employee benefit with respect to the aircraft use by the taxpayer's business associates on the heli-skiing trip, we refer you to paragraphs 4 and 6 of IT-160-R3. It is a question of fact whether the heli-skiing trip was made "primarily for business purposes, in the sense that the main reason for the flight is to transport passengers in order that they may conduct business activities at the destination". We have not been provided any information (or submissions from the taxpayer) regarding the purpose of this trip other than your statement that the "main activity of the heli-skiing is not for genuine business purposes". Our initial reaction is that a taxpayer would have a difficult time convincing the CCRA that a trip to a lodge where the daily activity is heli-skiing would meet the "primary business purpose" requirement in paragraph 6 of IT-160R3.
Even though the heli-skiing trip was likely not done primarily for business purposes, we would not suggest including the benefits attributable to the business associates use of space on the aircraft as part of the taxable benefit of Mr. X unless you have some evidence that their business connections to the company are merely incidental or their connection to Mr. X is more of a social connection (i.e. the business associates are merely personal friends of Mr. X).
In other words, the positions described in paragraphs 4 & 6 of IT-160R3 were intended to deal with friends and relatives. Even though the CCRA may be able to justify treating the trip as done primarily for personal purposes, it would be another thing to include the benefits conferred on business associates in the benefit computation for Mr. X. In this regard, you have stated " ... the main activity of the heli-skiing is not for genuine business purposes, (i.e. personal) and although there may be some business purpose to the trip ...".
The above comments regarding the benefits derived by the business associates with respect to their use of the aircraft apply equally to the other benefits realized by them at the lodge. That is, unless the CCRA can establish that these associates are more or less friends of Mr. X, we would not recommend including the value of the associates' benefits in Mr. X's employee or shareholder benefit computation, as the case may be.
We would be glad to assist you more on this matter once you have collected more facts.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. 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 LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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