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: Tax consequences when corporation reimburses a shareholder/employee for using his personal Air Miles to pay for business-related travel
Position: Question of fact.
Reasons: Deductible to corporation only if payment was made to Mr. X in his capacity as an officer or employee. Not taxable to recipient only where it is clearly established that the employee used his personal Air Miles to pay for business travel, and reimbursement does not exceed fair market value of business trip. Where Mr. X has accumulated both business and personal Air Miles, we will presume that he always uses his business Air Miles first when redeeming the Air Miles for business travel.
January 9, 2003
Edmonton Tax Services Office HEADQUARTERS
Barrie J. Wickware Wayne Antle
Technical Enquiries (613) 957-2102
2002-016800
Reimbursement for Air Miles used on Business Trip
This is further to your memorandum dated October 11, 2002, concerning the tax implications of amounts paid by a corporation to its chief shareholder ("Mr. X") to compensate him for Air Miles that he used to pay for a business trip.
When Mr. X travels for business reasons, the corporation reimburses him for the cost of the trip. The corporation is proposing to also pay Mr. X an amount equal to the fair market value of the business trip when he uses his Air Miles to pay for the cost of the travel. The representative is unsure whether Mr. X accumulated Air Miles from business expenditures, for which he was reimbursed ("business Air Miles"), personal expenditures ("personal Air Miles"), or a combination of both business and personal expenditures.
You have asked us to consider two issues with respect to this arrangement.
1. Is Mr. X required to include the amount paid in his taxable income?
2. Is the payment made to Mr. X a deductible business expense to the corporation?
Our comments on each issue are as follows:
Issue 1
In considering this issue, it is contemplated that Mr. X has accumulated a combination of personal Air Miles and business Air Miles. When determining whether business Air Miles or personal Air Miles are used to pay for business-related travel, we will presume that the business Air Miles will always be used first. Accordingly, if Mr. X has collected enough business Air Miles to cover the cost of the business trip, it is our view that any amount received by Mr. X in excess of the cost incurred by him to redeem the Air Miles would be included in his income as either a shareholder or an employment benefit. On the other hand, if there is an insufficient number of business Air Miles to cover the cost of the business-related travel, a reasonable payment for the portion related to the personal Air Miles redeemed for such travel will not be included in Mr. X's income. In order for any such payment to be excluded from Mr. X's income, he must clearly establish that the payment received from the corporation relates to personal Air Miles that he used for business-related travel.
Issue 2
In order for an outlay or expenditure incurred by a business to be deductible, it must be incurred for the purpose of gaining or producing income from the business in accordance with paragraph 18(1)(a) of the Income Tax Act (the "Act"), and not be otherwise prohibited by a specific provision in the Act. In addition, section 67 of the Act provides that an expense is only deductible to the extent that it is reasonable in the circumstances. The determination of whether an expense is incurred to earn income, and whether it is reasonable, can only be made after reviewing all of the facts and documentation. Where a corporation reimburses its officers or employees for reasonable costs incurred by them to undertake business-related travel, the amounts paid are generally deductible to the corporation.
In the situation outlined above, if it is established that the payment was made to Mr. X to reimburse him for using his personal Air Miles (after exhausting his business Air Miles) to undertake business-related travel for the corporation, and the amount is reasonable in the circumstances, then the corporation would normally be entitled to deduct the amount paid. However, if the amount were included in Mr. X's income as either an employment or shareholder benefit, the deductibility of the payment would depend upon whether Mr. X received it in his capacity as an employee or shareholder of the corporation. This can only be determined after considering all of the facts including the degree of control exercised by the shareholder over the corporate decision making process, the availability of similar payments to other employees of the corporation, and the manner in which the amount of the payment is calculated. If the payment is made to Mr. X in his capacity as a shareholder of the corporation, then it would not be considered to be incurred for the purpose of gaining or producing income and would therefore not be deductible.
Even where no payment has been made to Mr. X by the corporation, he may still be considered to have received a benefit when he uses his business Air Miles. Such a benefit arises when Mr. X redeems business Air Miles to acquire an airline ticket, or other merchandise, for his own personal use. In this situation, the portion of the fair market value of the personal items so acquired related to the business Air Miles redeemed for such an acquisition, will be included in Mr. X's income as either a shareholder or employment benefit. In determining whether business Air Miles or personal Air Miles are used to acquire the personal items, we will presume that the personal Air Miles will be used first. Please refer to paragraph 14 of IT-470R (Consolidated) Employees' Fringe Benefits for a discussion on frequent flyer points.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency'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. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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