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: Tax consequences when corporation reimburses a shareholder/employee for using personal Air Miles to pay for business-related travel.
Position: It is a question of fact.
Reasons: Generally a reimbursement would be deductible by the corporation and would not be taxable to the employee where it is clearly established that the employee used his personal Air Miles to pay for business travel, and the reimbursement does not exceed fair market value of the tickets obtained.
XXXXXXXXXX
2010-037863
Rita Ferguson
519-645-5261
October 14, 2010
Dear XXXXXXXXXX :
Re: Technical Interpretation Request - Reimbursement of Air Miles
This is in response to your letter of August 15, 2010 inquiring about the tax consequences of receiving reimbursements from your professional corporation for tickets obtained using your personal Air Miles for employment-related air travel.
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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
Subsection 248(1) of the Income Tax Act (the "Act") defines a "professional corporation" as a corporation that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor. In certain situations where the corporation has been interposed in what would normally constitute an employee-employer relationship, a professional corporation may be carrying on a "personal services business" as defined in subsection 125(7) of the Act. Where this is the case, the expenses that may be deducted by the professional corporation are limited to those described in paragraph 18(1)(p) of the Act. Our comments below are based on the assumption that you are an employee and shareholder of a professional corporation which is not carrying on a personal services business. We have also assumed that any reimbursement would be made to you in your capacity as an employee and not in your capacity as a shareholder.
In considering this issue it is also contemplated that you may have accumulated a combination of personal Air Miles and business Air Miles. By "business Air Miles" we mean those accumulated while travelling on employer-paid business trips. Information on the correct tax treatment for the redemption of business Air Miles may be found at paragraph 14 of Interpretation Bulletin IT-470R, "(Consolidated) Employees' Fringe Benefits" and in Income Tax Technical News No. 40. When determining whether business Air Miles or personal Air Miles have been used to obtain tickets for business-related travel, the CRA will presume that the business Air Miles will always be used first. Accordingly, if you have collected enough business Air Miles to cover the amount required for a ticket, it is our view that any amount paid to you by your professional corporation in excess of the cost incurred to redeem the Air Miles should be included in your income as an employment benefit. On the other hand, if a ticket has been obtained through the redemption of personal Air Miles only, a reasonable amount for the value of such a ticket which is used for business-related travel may be paid to you without being included in your income.
Regarding your professional corporation, 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 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. In your situation, given our assumption that the payment would be made to you in your capacity as an employee, if it is established that a payment was made to reimburse you for using personal Air Miles (after exhausting all business Air Miles) to undertake business-related travel for the corporation, and the amount was reasonable in the circumstances, then the corporation would normally be entitled to deduct the amount paid.
The fair market value of the tickets obtained through the redemption of Air Miles will always be a question of fact. Care must be taken to adjust for the differences in value attributable to restrictions placed on such tickets. The case of Mommersteeg et al v The Queen, [1995] 2 CTC 2767 (TCC) considered the value of frequent flyer points that were redeemed for air travel ("reward tickets") for the purposes of paragraph 6(1)(a) of the Act. The court decided that the proper measure of the value of the reward tickets in that case was the price which the employee would have been obliged to pay for a comparable ticket entitling him to travel on the same flight in the same class and subject to the same restrictions as were applicable to the reward tickets. Since it seemed likely that restrictions to which first class and business class reward tickets were subject reduced the value of them to the same extent that restrictions on economy class reward tickets reduced their value, the value of a reward ticket in either business or first class was equal to that proportion of an unrestricted business or first class fare which the price of the most heavily discounted economy class fare on that flight was of the price of a full fare economy class ticket.
It is our view that the use of a similar valuation method in your situation would generally be reasonable.
We trust that these comments have been of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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