2 June 2005 External T.I. 2005-0116801E5 - Airplane Lease Costs & Withholding Tax

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.

Principal Issues: Canco leases an airplane from USco for use in the shareholder's business travel. 1. Whether the lease payments and operating expenses (such as fuel, maintenance, insurance and pilot's salary) are deductible. 2. Whether withholding tax applies to the lease payments.

Position: 1. Whether or not the expenses are deductible is a question of fact. 2. No, withholding tax does not apply to the lease payments.

Reasons: 1. Reasonable costs incurred in providing air travel are deductible to Canco to the extent that they are laid out to earn income from a business or property, therefore, operating costs related to the personal use of an aircraft by the shareholder are not deductible by Canco. 2. Payments made by Canco to arm's length USco for the lease of an aircraft for use in Canada are not subject to withholding tax pursuant to subparagraph 212(1)(d)(xi).

XXXXXXXXXX 2005-011680
Kathryn McCarthy, CA
June 2, 2005

Dear XXXXXXXXXX:

Corporate Airplane Lease Costs and Withholding Tax

This is in reply to your letter dated February 16, 2005, concerning the above noted subject matter.

You described a situation where Canco leases an airplane from USco for use in the shareholder's business travel. You enquired as to whether the lease payments and operating expenses (such as fuel, maintenance, insurance and pilot's salary) are deductible under the Income Tax Act (the Act) and whether withholding tax applies to the lease payments.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following comments.

When an aircraft is used for a business flight and each of the individuals using the aircraft does so for business reasons, taxable benefits do not generally arise. A "business flight" is one made primarily for business purposes. See Interpretation Bulletin IT-160R3, Personal use of aircraft, at http://www.cra-arc.gc.ca/formspubs/prioryear/it160r3/it160r3-e.html for more information.

An individual who uses, for personal purposes, an aircraft that is leased by the individual's employer or corporation and who pays less than a reasonable charge for such use is considered to have derived a benefit from that use. When that benefit is received or enjoyed by virtue of employment or shareholdings, the value of the benefit is included in the individual's income pursuant to paragraph 6(1)(a) or subsection 15(1) of the Act, respectively. The value of the taxable benefit is determined on the basis of what is reasonable in relation to the facts of each case.

Reasonable costs incurred in providing air travel are deductible to Canco to the extent that they are laid out to earn income from a business or property. Generally, an employer may deduct reasonable costs incurred in providing air transportation to an employee, whether for business or personal purposes. However, operating costs related to the personal use of an aircraft by the shareholder are not deductible by Canco because they are not considered to be laid out to earn income.

Payments made by Canco to arm's length USco for the lease of an aircraft for use in Canada are not subject to withholding tax. Subparagraph 212(1)(d)(xi) of the Act exempts USco from an income tax of 25% of the gross amounts paid to USco by Canco as rent for the use, or the right to use, an aircraft in Canada.

We trust these comments are helpful.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch