2014-0527842I7 Taxable benefit for an aircraft

Principal Issues: 1. Does IT-160R3 applied for years under review? 2. Should the taxable benefit be evaluated with first class airfare or the operating costs related to personal use? 3.What is the impact in calculating the income for the corporation for operating costs related to personal use of the aircraft?

Position: 1. Yes. 2. The value placed on a benefit should approximate its fair market value. 3. The deduction of expenses related to personal use of the aircraft would be precluded by paragraphs 18(1)a) and 13(7)c) and d).

Reasons: 1.The bulletin IT-160R3 continues to reflect the position of the CRA until it was cancelled 2. Position taken by the jurisprudence. 3. Limitation by paragraphs 18(1)a) and 13(7)c).

Author: Gagnon, Danny
Section: 6(1)a), 15(1), 15(1.4)c), 246(1), 18(1)a), 13(7)c), 13(7)d)

                                                                                                                                           March 3, 2015

      XXXXXXXXXX TSO                                                                                                     HEADQUARTERS
      Audit – Basic File Section                                                                                             Income Tax Rulings Directorate
      Business and Employment                                                                                           Division
      Attention: XXXXXXXXXX                                                                                              Danny Gagnon, CPA, CA, M. Fisc.
      Team Leader
                                                                                                                                             2014-052784

      Personal use of aircraft – Taxable benefit

This document is in response to the email and memorandum received on April 14, 2014, in which you requested our opinion on computing a taxable benefit relating to the personal use of an aircraft in the situation outlined below. We have taken into account the additional information obtained from subsequent communications.

Legislation

Unless otherwise expressly stated, all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, 5th Supplement, c.1, as amended (the “Act”).

Also, in this document, unless otherwise expressly stated, the terms and expressions defined in the Act have the meaning assigned by the Act.

Designation of the parties and abbreviations

For the purposes of this interpretation, names and business names, as well as various terms, are replaced by the following names, business names and abbreviations:

XXXXXXXXXX                                                                       Mr. A
XXXXXXXXXX                                                                       Mr. B
XXXXXXXXXX                                                                       Corporation C
XXXXXXXXXX                                                                       Corporation D
XXXXXXXXXX                                                                       Corporation E
Canada Revenue Agency                                                      CRA
XXXXXXXXXX Tax Services Office                                       TSO
Fair market value                                                                   FMV
Capital Cost Allowance                                                          CCA
IT-160R3, “Personal use of aircraft” (footnote 1)                   Bulletin IT-160R3

Facts

Based on the information you submitted to us, the relevant facts are as follows:

1.    Mr. A holds all of the shares of Corporation C.

2.    Corporation C holds all of the shares of Corporation D.

3.    Corporation D holds all of the shares of Corporation E.

4.    Mr. B is the father of Mr. A and is the director of Corporation D and Corporation E.

5.    In XXXXXXXXXX, Corporation E acquired an aircraft for business purposes (“Aircraft”) for $XXXXXXXXXX.

6.    Although you were unable to obtain the Aircraft’s original log books, the total usage percentages for personal use of the Aircraft by Mr. A and Mr. B were calculated by Corporation E and accepted by you based on the following percentages.

      XXXX                XXXX                XXXX
      XXXX%             XXXX%             XXXX%

7.    Corporation E calculated the taxable benefit for Mr. A and Mr. B with respect to the personal use of the Aircraft based on the equivalent cost of a first-class plane ticket for a similar trip, as suggested in Bulletin IT-160R3. The value of the benefits was included in the respective T4 slips of Mr. A and Mr. B. The total value of the taxable benefits was determined as follows:

      XXXX               XXXX               XXXX
      $XXXX             $XXXX             $XXXX 

8.    You are currently auditing the XXXXXXXXXX and XXXXXXXXXX tax years, in addition to conducting a targeted audit for the XXXXXXXXXX and XXXXXXXXXX tax years for everything related to the Aircraft expenses and the related taxable benefits.

9.    The Aircraft operating costs and the CCA that you plan to disallow for Corporation E for each of the taxation years, being, the proportion representing the personal use of the Aircraft, are as follows:

      XXXX         XXXX               XXXX
      $XXXX       $XXXX             $XXXX

10.   In your opinion, Corporation E confers a taxable benefit for the personal use of an Aircraft, of which the value must be included in Mr. A’s and Mr. B’s income under subsection 246(1). The benefit is conferred on Mr. A in his capacity as a shareholder and to Mr. B in his capacity as an individual related to the shareholder, Mr. A.

11.   During the years under audit, no employee of Corporation E used the Aircraft for personal use.

Your questions 

12.   You asked us the following questions in your email dated April 14, 2014; which we are presenting as submitted:

a)    “Is the CRA compelled to apply the Interpretation Bulletin IT-160R3 (archived) for the years currently under audit, considering the bulletin is dated from 1992, is archived and has not been applied in any judgment?” [Translation]

b)    “Should the taxpayer’s taxable benefit be computed based on the equivalent cost of a first-class plane ticket for a similar trip or based on the same amount of the expenses disallowed to the corporation, which correspond to the percentage of personal use of the aircraft?” [Translation]

13.   Furthermore, in various communications, we were asked to comment on the impact of the personal use of the aircraft owned by Corporation E on the calculation of Corporation E’s income and expenses.

Your position

14.   In your opinion, Bulletin IT-160R3 should not be applied in this situation. You mention that Bulletin IT-160R3 is archived during the years under audit and that it was cancelled in September 2012.

15.   You add that Bulletin IT-160R3 does not take into account the stare decisis rule, the principle that the current courts are bound by judgments that were handed down in the past. You discuss several decisions and are of the opinion that the stare decisis principle of these judgments should apply to your situation, namely computing the value of the taxable benefits. Furthermore, you mentioned that Bulletin IT-160R3 was never applied by the courts.

16.   With respect to calculating the taxable benefit, you are of the opinion that the value of the taxable benefit for Mr. A and Mr. B. should be the corresponding proportion of the personal use of the Aircraft for the operating costs and CCA of the Aircraft owned by Corporation E.

17.   To support your position, you mention that, according to the courts, the amounts disallowed to the corporation, which is the operating costs of the aircraft (including the CCA) multiplied by the percentage of personal use by an individual, must be added to the latter’s income as a taxable benefit.

18.   With respect to calculating the income of Corporation E, you maintain that it can deduct only the operating costs and the CCA relating to the business use of the Aircraft.

Taxpayer’s position

19.   The taxpayer mentions that he is concerned that the guidelines contained in a valid interpretation bulletin are not being applied and that the TSO sent a proposal letter without following that interpretation bulletin.

20.   The taxpayer believes that Bulletin IT-160R3’s guidelines are valid for the years under audit. He maintains, on the basis of IT-Index, Income Tax Interpretation Bulletins and Technical News and Chapter 10 of the [Income Tax Audit Manual], that all of court judgments handed down prior to the publishing of Bulletin IT-160R3 were incorporated into the bulletin. Consequently, when it was published, Bulletin IT‑160R3 reflected the CRA’s interpretation of the Act that was in force.

21.   Moreover, the taxpayer emphasizes that, in a technical interpretation from 2011, the CRA still referred to Bulletin IT-160R3.

22.   During a discussion, the taxpayer told you that he understood and did not argue with the method used to calculate the value of the taxable benefit based on the operating costs of the Aircraft and the CCA, which is the proportion of the personal use of the Aircraft. However, the taxpayer asked you to grant him “tax relief” by allowing the value of the benefit to be calculated based on the cost of a regular first-class ticket.

Our approach

23.   In this case, Mr. A and Mr. B use Corporation E’s Aircraft for personal travel. In this regard, Mr. A and Mr. B agree with your position, namely that a benefit was conferred on them. You have stated that paragraph 6(1)(a) and section 15(1) do not apply to your situation; consequently, we will not comment on this matter. Given the facts you submitted to us, we agree with you that section 246(1) applies to your file, and we will see how we will apply it. Next, it will be necessary to determine the value of the benefit. Since the Act does not outline the method for computing the value of a taxable benefit related to the personal use of an aircraft, we have reviewed the case law on section 15(1) and paragraph 6(1)(a). Additionally, our analysis takes into account judgments that specifically deal with taxable benefits and personal use of an aircraft, as well as the application of Bulletin IT-160R3. Finally, we address the deductibility of the expenses in calculating Corporation E’s income.

The Act

24.   The provisions that apply to your file are paragraphs 6(1)(a) and 15(1.4)(c), as well as subsections 15(1) and 246(1), which read in part as follows: 

Paragraph 6(1)(a) :

25.   “ There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(a) Value of benefits — the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office or employment, except any benefit:

      […] ”

Paragraph 15(1.4)(c) :

26.   “ For the purposes of this subsection and subsection (1),

[…]

 (c) a benefit conferred by a corporation on an individual is a benefit conferred on a shareholder of the corporation, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder of the corporation — except to the extent that the amount or value of the benefit is included in computing the income of the individual or any other person — if the individual is an individual, other than an excluded trust in respect of the corporation, who does not deal at arm’s length with, or is affiliated with, the shareholder, member of the partnership or contemplated shareholder, as the case may be;

[…]”

Subsection 15(1) :

27.   “ If, at any time, a benefit is conferred by a corporation on a shareholder of the corporation, on a member of a partnership that is a shareholder of the corporation or on a contemplated shareholder of the corporation, then the amount or value of the benefit is to be included in computing the income of the shareholder, member or contemplated shareholder, as the case may be, for its taxation year that includes the time, except to the extent that the amount or value of the benefit is deemed by section 84 to be a dividend or that the benefit is conferred on the shareholder

[…] ”

Subsection 246(1) :

28.   “ Where at any time a person confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in the taxpayer’s income or taxable income earned in Canada under Part I and would be included in the taxpayer’s income if the amount of the benefit were a payment made directly by the person to the taxpayer and if the taxpayer were resident in Canada, be

      (a) included in computing the taxpayer’s income or taxable income earned in Canada under Part I for the taxation year that includes that time; or 

[…] ”

Application of the provisions

29.   In general, when a corporation confers a benefit on an individual during a taxation year, the value of that benefit must be included in computing the individual’s income. The value of the benefit for the use of a corporation’s aircraft can be included in the income under, inter alia, paragraph 6(1)(a) and subsection 15(1).

30.   Paragraph 6(1)(a) applies to benefits conferred on employees, while subsection 15(1) applies to benefits conferred on shareholders. If the individual on whom a benefit is conferred by a corporation is both a shareholder and an employee, it must be determined whether the benefit was conferred based on the individual’s capacity as shareholder or employee.

Based on the facts you submitted to us, we agree with you that paragraph 6(1)(a) does not apply to your file. You are of the opinion that the benefit for the personal use of the Aircraft is conferred on Mr. A in his capacity as shareholder and on Mr. B. in his capacity as being related to shareholder Mr. A. Furthermore, given the facts in your file, we agree with you that subsection 15(1) may not be invoked to add the value of the benefit to the respective income of Mr. A and Mr. B.

31.   When paragraph 6(1)(a) or subsection 15(1) do not apply to a situation where a benefit is conferred (for example, because a benefit is conferred on an indirect shareholder), then in some cases subsection 246(1) may be invoked.

Application of subsection 246(1) for the benefit conferred on Mr. A

32.   You indicated to us that Corporation E conferred a benefit on Mr. A and Mr. B for personal use of the Aircraft and that the value of this benefit should be included in their respective incomes in accordance with subsection 246(1). Although your enquiry is essentially limited to computing the taxable benefit as well as the deductibility of expenses for Corporation E, we would like to bring to your attention that it does not seem clear, given the facts and considering that Corporation E conferred the benefit, that it is possible to justify an inclusion in income under subsection 246(1). However, it is our view that subsection 246(1) may apply to your file if it were established that Corporation C conferred the benefit for the personal use of the Aircraft.

33.   According to subsection 246(1), the value of the benefit that a person confers directly or indirectly on a taxpayer must be included in computing his or her income insofar as that value would be included in the calculation if it were a payment made directly by that person to the taxpayer. Although it can be shown that Corporation E conferred a benefit on Mr. A, the value of the benefit would not be included in computing Mr. A’s income under Part I of the Act if it was a payment made directly to Mr. A, since Mr. A is not a shareholder of Corporation E. From that perspective, subsection 246(1) does not apply to a benefit conferred by Corporation E on Mr. A because, specifically, the condition regarding the hypothetical payment is not met.

34.   However, in the judgment rendered by the Tax Court of Canada in Massicotte, (footnote 2)  the judge concluded that subsection 246(1) could apply when a corporation confers a benefit on an indirect shareholder.

In that court case, Mr. Massicotte (“Massicotte”) held all the shares of Gestion Amadéus‑Amadéus Ltée (“Amadéus”), which in turn held all the shares of the operating company, Les Consultants Pub Création Inc. (“Pub”). Massicotte also held a $240,000 recoverable debt, of which the debtor was his former business partner. Massicotte transferred the recoverable debt to Pub in exchange for the cancellation of $240,000 of various loans granted to Massicotte by Pub. The Minister concluded that the debt transferred to Pub by Massicotte has no value and took the position that there was a benefit and that the value of the $240,000 benefit was taxable under subsection 246(1).

In response to the notice of appeal, the Minister took the position that Pub had conferred a benefit of $240,000 on Massicotte under subsection 246(1) and also stated as an alternative argument that it was a benefit conferred by Pub as an employer of Massicotte under paragraph 6(1)(a). The Minister then filed a motion to the Court to modify his response to the notice of appeal.

In the first decision by the Tax Court of Canada, (footnote 3)  Judge Tardif accepted the Minister’s motion to change the person who conferred the benefit on Massicotte under subsection 246(1) to Amadéus instead of Pub. Moreover, he agreed to withdraw the argument that the benefit was taxable under paragraph 6(1)(a).

In the second decision by the Tax Court of Canada, (footnote 4)  the evidence made it possible to conclude that the benefit had been conferred by Pub under paragraph 6(1)(a). Judge Archambault decided to invoke paragraph 6(1)(a) on his own accord, despite the fact that the Minister had withdrawn it from the proceedings. According to the judge, the evidence also justified the conclusion that the same benefit had been conferred by Amadéus under subsection 246(1). On this issue, Judge Archambault’s comments at Paragraph 101 were as follows:

“ [101] In my view, it is not necessary to use subsection 246(1) of the Act to include the $239,000 benefit in Mr. Massicotte’s income because paragraph 6(1)(a) of the Act requires that the amount of the benefit be included. If I was wrong to conclude thusly, I would conclude that this benefit should be included under subsection 246(1) of the Act. I would then conclude without any hesitation whatsoever that the $239,000 benefit was conferred indirectly on Mr. Massicotte by Amadeus, and that if Amadeus had done it directly, the value of the benefit would have been included in Mr. Massicotte’s income, under subsection 15(1) of the Act. Mr. Massicotte, as a shareholder, controlled Amadéus, and Amadéus controlled Pub. […]”

Massicotte appealed the decision by the Tax Court of Canada, maintaining that Judge Archambault could not invoke paragraph 6(1)(a) on his own accord to tax the benefit because the Minister had withdrawn it from the proceedings. Furthermore, the Minister would not have been able to invoke that paragraph himself because the normal assessment period had expired.  Based on Judge Archambault’s arguments outlined in Paragraph 101, Judge Noël of the Federal Court of Appeal held that Massicotte had received a taxable benefit under subsection 246(1). He indicated that Judge Archambault had a duty to confirm the Minister’s assessment without going further because he had concluded that there was a benefit under subsection 246(1) and that, moreover, the value of the benefit had not been included in Massicotte’s income. Judge Noël pointed out that subsection 246(1) can be the sole basis of assessment when the circumstances permit.

35.   As in Massicotte, (footnote 5)  the facts of your file involve various levels of corporations. In our view, in order to justify an assessment under subsection 246(1), it must be demonstrated that the following three conditions are met:

*     Corporation C confers directly or indirectly a benefit on Mr. A;
*     ?he value of the benefit is not otherwise included in Mr. A’s income under Part I; and
*     The value of the benefit would be included in Mr. A’s income if it was a payment that Corporation C had made directly to Mr. A.

We are of the opinion that, in order to meet the first condition, it must be shown that Corporation C has an influence on Corporation E. We believe that this influence of Corporation C on Corporation E is exercised by Mr. A, since he is a shareholder who controls Corporation C, and Corporation C controls Corporation D, and Corporation D controls Corporation E. According to the facts, Mr. A was an indirect shareholder of Corporation E. Mr. A was the directing mind of these corporations, and he was the sole ultimate and indirect shareholder of Corporation E. It is our view that he was in a position where he could make decisions to influence Corporation C in order to require Corporation E to allow the personal use of its Aircraft for himself as well as Mr. B. Therefore, the first condition is met, and, consequently, in our view Corporation C is conferring a benefit on Mr. A and Mr. B.

For the second condition, based on the facts you submitted, Mr. A already included an amount for the value of the benefit arising from personal use of the Aircraft in his income. As a result, in order to prevent double taxation, only the portion of the value of the benefit that is not included in computing Mr. A’s income should be included in his income.

The third condition is met because, had Corporation C made a payment directly to Mr. A, that payment would have been included in computing Mr. A’s income under subsection 15(1).

In conclusion, an assessment under subsection 246(1) could be justified for the benefit conferred by Corporation C on Mr. A of the personal use of the Aircraft because the three application conditions of this subsection are met.

Application of paragraph 15(1.4)(c) and subsection 246(1) for the benefit to Mr. B

36.   We have already concluded in Paragraph 35 that Corporation C conferred a benefit on Mr. B (in addition to the benefit conferred on Mr. A). However, we are of the opinion that the value of the benefit conferred on Mr. B cannot be included in his income under subsection 246(1) because the condition regarding the hypothetical payment by Corporation C is not met. Indeed, if Corporation C had made a payment directly to Mr. B, that payment would not have been included in computing the income of Mr. B by virtue of subsection 15(1) or paragraph 6(1)(a) because he is neither a shareholder nor a director of Corporation C, and it would not be included under a different provision of the Act.

37.   However, it is possible to consider applying paragraph 15(1.4)(c). Briefly, that paragraph sets forth a rule that applies after October 30, 2011, in cases where a benefit is conferred on an individual who is not dealing at arm’s length with a shareholder of the corporation. In this case, paragraph 15(1.4)(c) stipulates that, for the purpose of subsection 15(1), a benefit is conferred on a shareholder. This rule does not apply to the extent that the value of the benefit is included in computing the income of the individual or another person. Consequently, by combining subsection 246(1) and paragraph 15(1.4)(c), we are of the opinion that after October 30, 2011, Mr. A will have to include the value of the benefit conferred by Corporation C to Mr. B in his income.

Under paragraph 15(1.4)(c), the benefit conferred on Mr. B by Corporation B would instead be a benefit conferred on Mr. A, who is a shareholder of Corporation C, since Mr. B is not dealing at arm’s length with Mr. A. Therefore, for this benefit, subsection 246(1) should be applied because Corporation C conferred a benefit on Mr. A.

38.   Furthermore, for a benefit conferred on Mr. B prior to November 1, 2011, we believe that if would be impossible to add the value of the benefit arising from the personal use of the Aircraft by Mr. B to the income of Mr. B or Mr. A.

Connections between 6(1)(a), 15(1) and 246(1)

39.   No court has concluded on how to determine the value of a taxable benefit under subsection 246(1). However, in our view the court decisions that are applicable under 6(1)(a), 15(1) and 246(1) and that address the notion of “value of a benefit” may be relevant to the application of one or more of these three provisions.

40.   Indeed, the wording of subsections 15(1) and 246(1) use, respectively, the following terms: “ […] a benefit is conferred by a corporation […], then the amount or value of the benefit […] “ and “ […] a person confers a benefit […], the amount of the benefit […] “. Furthermore, paragraph 6(1)(a) reads as follows:” the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer […] “. The courts analyzed the terms used in paragraph 6(1)(a) and subsection 15(1) regarding a benefit conferred and a benefit received as well as the notion of “value.”

41.   In this regard, in Massicotte, (footnote 6)  Judge Archambault, in his analysis to determine whether an employee received or enjoyed a benefit by virtue of his office or employment under paragraph 6(1)(a), indicated the approach to adopt is that used by the Federal Court of Appeal in Kennedy. (footnote 7)  In that court case, Judge Jackett spoke to the meaning of a benefit awarded to a shareholder under subsection 8(1) (now 15(1)). After having quoted an excerpt from Kennedy, Judge Archambault mentioned the following:

“ [52]   Paragraph 6(1)(a) of the Act refers not to a benefit conferred, but to a benefit received, by a taxpayer or enjoyed by a taxpayer but there is no incompatibility between these expressions. On the contrary, one is the reverse of the other. When there is a question of a benefit conferred, the situation has to be looked at from the viewpoint of the provider of the benefit. When there is a question of the receipt or enjoyment of a benefit, it has to be looked at from the viewpoint of the receiver of the benefit. In other words, if a benefit was conferred by one person on another, this means that the receiver received it or enjoyed it. […]”

42.   In Anthony, (footnote 8)  the Tax Court of Canada judge had to decide if the parking spot provided to the appellants by their employer constituted a benefit under paragraph 6(1)(a) and, if so, what the value of that benefit was. In his analysis, the judge indicated that the term “value” for the purposes of paragraph 6(1)(a), as interpreted as being the FMV in Schroter, (footnote 9)  was compatible with the interpretation given of the same term included in other provisions of the Act, namely in subsection 15(1). He stated the following:

“ [52]   This interpretation of the word “value” in paragraph 6(1)(a) is consistent with the interpretation that has been placed on the same word in other provisions of the Act. For example, in Steen v. The Queen,[6] the Federal Court Trial Division held that the words “the value of the shares”, in paragraph 7(1)(a) of the Act (dealing with stock option benefits), referred to the fair market value of the shares. 
[…]
 [53]   Also, in Youngman v. The Queen, it appears that the Federal Court of Appeal accepted that the “value” of a shareholder benefit, required to be included in a taxpayer’s income under section 15, was equal to the fair market value of the benefit. At paragraph 19, the Court said:
19  In order to assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it if necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.”

43.   The aforementioned case law shows that some elements of paragraph 6(1)(a) and subsection 15(1) are interrelated. On one hand, the expressions “the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer […]” and “[…] a benefit is conferred by a corporation […], then the amount or value of the benefit […]” are not incompatible because they both state what should be included in income, namely the value of a benefit. Based on the facts, if it can be demonstrated that a benefit was conferred on an individual, or that individual received or enjoyed that benefit, the amount of the benefit must be included in the income, insofar as the other conditions stipulated in the relevant provisions are met. On the other hand, FMV represents a suitable indicator of the term “value,” whether it is examined in the context of paragraph 6(1)(a) or subsection 15(1).

44.   We have not found any judgment that shows the interrelationship between these elements of subsection 246(1) and paragraph 6(1)(a) or subsection 15(1). However, we are of the opinion that, because of the similar wording of subsections 246(1) “ […] a person confers a benefit […], the amount of the benefit […] “ and 15(1) “ […] a benefit is conferred by a corporation […], then the amount or value of the benefit […] “, we can make an analogy using subsection 246(1), paragraph 6(1)(a) and subsection 15(1). Consequently, the case law on paragraph 6(1)(a) and subsection 15(1) can be used to establish the value of a benefit under subsection 246(1).

Value of a benefit under subsection 15(1)

Value of the benefit based on the FMV

45.   In the situation described, you and the taxpayer agree on the facts that a benefit was conferred on Mr. A and Mr. B for the personal use of the Aircraft. However, there is no consensus on the value of that benefit. Therefore, as you mentioned in your question, it is appropriate to determine the value of the benefit.

46.   Since the Act does not provide guidance on how to determine the value of a taxable benefit for the personal use of an aircraft, case law must be used to determine the value of that benefit.

47.   The Youngman (footnote 10)  decision is a key source of law for evaluating the value of a benefit conferred on a shareholder. To summarize, in that court case the corporation, all shares of which were controlled by Mr. Youngman (“Youngman”) and his family, acquired land with the intention of subdividing and building residential units. The municipality rejected the project. It was subsequently decided that, in order to give renewed impetus to the development project, the corporation would build a house in which the Youngman family would live. Youngman estimated the rental value of the house at $1,100 a month, and paid that amount to the corporation. The Minister felt that the rent paid by Youngman was too low and took the position that the shareholder’s benefit should have been calculated based on a 9% return on the amount spent by the corporation. The Federal Court of Appeal accepted that calculation and concluded as follows:

“ The appellant’s main proposition is that, under paragraph 15(l)(c) (footnote 11)  , what is to be added to the income of the shareholder is the value of the benefit that he received rather than the cost of that benefit to the corporation. That proposition is certainly well founded. However, it does not support the appellant’s conclusion. In determining the value of benefit, one may take its cost into consideration. Free market value is not, in all circumstances, the sole indication of real value.

[…]

In order to assess the value of a benefit, for the purposes of paragraph 15(l)(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder. In the present case, the benefit or advantage conferred on the appellant was not merely the right to use or occupy a house for as long as he wished; it was the right to use or occupy for as long as he wished a house that the company, at his request, had built specially for him in accordance with his specifications. How much would the appellant have had to pay for the same advantage if he had not been a shareholder of the company? Certainly more than what the two experts referred to as the free market rental value since, in my view, the company would have then charged a rent sufficient to produce a decent return on its investment. It is impossible to determine with accuracy the amount of that rent. However, subject to one important reservation, I cannot say that it would have been less than what the Minister assumed it to be. […]”

48.   In Youngman, (footnote 12)  the Federal Court of Appeal emphasized that the first step is to identify the benefit conferred by a corporation on its shareholder. The second step is to find out how much the shareholder would have paid a corporation of which he or she was not a shareholder for the same benefit. This principle is based on the generally accepted definition of FMV from Henderson Estate, (footnote 13)  and which is summarily defined as follows in Information Circular 89-3:

“ 3. (a) Fair market value is the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact.” (footnote 14)  

49.   On the basis of Youngman, (footnote 15)  we are of the opinion that the benefit arising from the personal use of the Aircraft should correspond to the price the user would have paid an independent corporation for a similar benefit.

50.   The principles outlined in Youngman (footnote 16)  were reiterated by the Federal Court of Appeal in Fingold. (footnote 17)  In that court case, the respondent and his brother were the owners of a holding and management company, which in 1987 purchased, renovated and refurnished a 4,610 square foot penthouse condominium in Florida at a cost of $4 million. The condominium was in the same building as the respondent’s mother’s condominium, where the family had traditionally spent their winter vacations. It had five bedrooms with en suite baths, and a restaurant-style kitchen. The condominium was used for business entertaining on few occasions in 1988 and 1989. The respondent and his wife personally used the condominium during their stays in Florida. The Minister held that the condominium had been acquired for personal use and used the return on investment method to evaluate the benefit under subsection 15(1). 

Judge Strayer of the Federal Court of Appeal reiterated the wording used by the judge in Youngman (footnote 18)  to conclude on the value of the benefit as calculated by the Minister and stated that “An amount equal to the equity rate of return is what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.” To support his decision, Judge Strayer emphasized that it was necessary to review the fundamental principles that are at issue in various decisions and used to determine the value of a benefit. In this regard, he quoted an excerpt (footnote 19)  from Youngman.

51.   Consequently, we are of the opinion that, in the case under review, a method must be used for calculating the value of the benefit that will establish the FMV of the benefit received, regardless of the reason Corporation E acquired the Aircraft.    

52.   In your situation, you indicated that Mr. A received the benefit regarding the personal use of the Aircraft in his capacity as shareholder and that Mr. B received this benefit because he is related to Mr. A.   Given that Youngman  (footnote 20)  and Fingold  (footnote 21)  specifically deal with the value of a benefit under subsection 15(1), we are of the opinion that the principle identified by these court cases, which serves to determine the value of a benefit, must be applied to your file. This principle is based on a simplified version of the generally accepted definition of FMV.

Valuation of the benefit based on the purpose for which the property was acquired

53.   The Tax Court of Canada judge in Fingold (footnote 22)  held that the condominium was purchased for business purposes and used for such and that, consequently, the value of the benefit received by the shareholder should be equal to the fair market rental value of the condominium. That decision was overturned by Judge Strayer of the Federal Court of Appeals. Furthermore, Judge Strayer rejected the approach taken by the Tax Court of Canada, according to which the method for determining the value of the benefit depends on the purposes for which the asset that confers a benefit was initially acquired. By his comment, Judge Strayer reversed the course of case law:

“The learned Tax Court Judge after reviewing a number of cases stated his understanding of the law as follows:

As can be seen by these cases See also: Meeuse v. Minister of National Revenue, [1992] 1 C.T.C. 2470, 92 D.T.C. 1549 (T.C.C.), affirmed (sub nom. Meeuse v. Canada), [1995] 1 C.T.C. 21 (sub nom. Meeuse v. R.), 94 D.T.C. 6640 (F.C.T.D.); Giffin v. Minister of National Revenue, [1991] 1 C.T.C. 2306, 91 D.T.C. 421 (T.C.C.) that [sic] in situations where a corporation acquires an asset for business purposes and uses that asset for business purposes, the shareholder who has use of the asset will be taxed on a benefit that is equal to the fair market rental value of that asset. In cases where the corporation has acquired the asset primarily for the shareholder’s use, the courts have found that the fair market rent may not always be the appropriate measure of the benefit conferred on the shareholder.

With respect it appears to me that the learned Tax Court Judge erred in law in adopting these principles as governing the calculation of value of a benefit conferred on a shareholder by a corporation.

It is true that a number of cases, mostly in the Tax Court of Canada, have applied such reasoning. I can however find nothing in the text of subsection 15(1) which supports a rule that if there is a business purpose in the acquisition and use of a property also used by a shareholder for his private benefit, it necessarily follows without more that the valuation of that benefit must be on the basis of a fair market rental. That is surely a gloss on the section which Parliament itself never adopted. […]” 
54.   Consequently, the Fingold  (footnote 23)  decision by the Federal Court of Appeal ended a school of thought advocating that the method for determining the value of the benefit depended on the purpose for which the property that conferred a benefit was acquired. Therefore, regardless of the purpose for which a property was acquired by a corporation, the value of the benefit arising from a shareholder’s personal use of the corporation’s property would have to be determined using any method for establishing the FMV of the benefit received.

Value of a benefit under paragraph 6(1)(a)

55.   We concluded previously that there are similarities between subsection 246(1) and paragraph 6(1)(a) regarding the notion of “value of the benefit” and that, therefore, the case law on this notion under paragraph 6(1)(a) can be used to establish the value of a benefit under subsection 246(1).

56.   In Anthony, (footnote 24) , employees of a not-for-profit private school were allowed to park their cars for free on the school grounds. The Minister considered that the employees’ parking spots represented a benefit under paragraph 6(1)(a) and reassessed them based on the FMV. As for the employees, they upheld that the free parking spots from which they benefitted were not taxable and, if they were, that the value should be determined according to a method based on the cost to the employer. Judge Paris of the Tax Court of Canada rejected the method proposed by the employees and instead opted for the FMV-based method.

With respect to the matter surrounding the value of the benefit, firstly, Judge Paris indicated that the Federal Court of Appeal in Schroter (footnote 25)  confirmed that “generally speaking, fair market value is the appropriate measure of the value of an employment benefit for the purposes of paragraph 6(1)(a) of the Act.”

Judge Paris then continued with excerpts from Schroter that he considered as an interpretation of the term “value” for the purposes of paragraph 6(1)(a):

“ 47   The equal treatment of taxpayers is facilitated by valuing their benefits at their fair market value.  On an administrative basis, the Canada Revenue Agency recognizes this and instructs employers that where the fair market value of a parking pass cannot be determined, no benefit should be added to an employee’s remuneration.  Where the fair market value can be determined, employers are instructed that the value of the benefit is based on the fair market value of the parking pass, less any payment the employee makes to use the space.  See: Canada Revenue Agency, Employers’ Guide – Taxable Benefits and Allowances 2009, T4130(E) Rev. 09.

48     Given the inherent fairness of this method of valuation, and the absence of objective evidence demonstrating that a fair market value based valuation is somehow inappropriate on the facts of this case, the Tax Court judge did not err by valuing the parking pass in the amount of its fair market value.”

Furthermore, the Court heard testimony from three expert witnesses regarding the fair rental value of the school parking spots. Each expert used the direct comparison approach to assess the value of the parking in question. According to this approach, the parking was evaluated based on transactions that dealt with similar parking spots. The judge therefore had to ask himself which method was more reasonable. In this regard, he specified how to select comparable elements:

“ [79]   Since each of the expert witnesses used the direct comparison approach, the reliability of their conclusions will depend on the comparables they chose and the similarity of those comparables to the Branksome Hall parking.  It would seem to me that the best comparables would be the ones with similar characteristics and nearest to the subject property because supply and demand factors of properties near the subject could be presumed to be similar to those affecting the subject. In order for a property that is some distance from the subject to be a valid comparable, there would need to be some evidence to show that the supply and demand factors are similar in both cases, or that the difference in location could somehow be adjusted for.” 

The Federal Court of Appeal (footnote 26)  agreed with Judge Paris’s conclusions regarding the use of FMV to determine the value of the benefit. The Court also remarked that the appellants’ arguments that the benefit should be evaluated based on the cost to the employer rather than on the FMV were invalidated by the Federal Court of Appeal’s decision in Spence. (footnote 27) 

57.   We are of the opinion that the value of the benefit for Mr. A and Mr. B for the personal use of the Aircraft should correspond to the FMV and not to the cost to Corporation E. This FMV could be calculated by making a comparison, among other things, on the basis of categories of aircraft with characteristics comparable to your situation.

58.   In Spence, (footnote 28)  the taxpayers were teachers at an Ontario school. The taxpayers’ children attended this school. Each year, the taxpayers benefitted from a 50% reduction on their children’s tuition. Every year, the school declared on the taxpayers’ T4s a taxable benefit that was added to their employment income. The taxable benefit was calculated as the difference between the reduced tuition costs billed to the taxpayers and the cost assumed by the school for providing instruction. The Minister issued a reassessment on the grounds that the total taxable benefit was instead the total FMV of the tuition fees. The Tax Court of Canada evaluated the benefit arising from the employment using the cost method rather than the FMV method.

The Federal Court of Appeal (footnote 29)  overturned the Tax Court of Canada decision, confirming that the value of the benefit received by the employees should be the FMV of the benefit they received, i.e., the amount of tuition the employees would have paid to send their children to their employer’s school had they not taught at the school. Judge Létourneau based his decision on paragraphs 47 and 48 of the Schroter (footnote 30)  decision by the Federal Court of Appeal.

59.   Based on the facts in your situation, taxation under paragraph 6(1)(a) does not seem applicable. However, as mentioned in the “Connections between 6(1)(a), 15(1) and 246(1)” section, case law that deals with the notion of “value of a benefit” under paragraph 6(1)(a) and subsection 15(1) can be used to determine the value of a benefit by virtue of subsection 246(1).

Therefore, it is our view that decisions handed down in Anthony (footnote 31) and Spence (footnote 32)  are relevant for your file in order to support that any taxable benefit should be evaluated at its FMV. 

60.   We note that, to date, case law is generally consistent with regard to determining the value of a taxable benefit, whether it is under subsection 15(1) or paragraph 6(1)(a). In short, that value must correspond to the FMV, i.e., the amount that a third party dealing at arm’s length would normally pay for a good or service. We are of the opinion that it is highly unlikely that the courts would adopt a new and different interpretation with respect to determining the value of a taxable benefit. The case law is in fact clear, and the value of a taxable benefit should correspond to its FMV.

Case law specific to aircraft

61.   There are a limited number of court cases that deal specifically with the taxable benefit associated with the personal use of an aircraft, and only one of these decisions has the value of a taxable benefit as a point at issue. We will discuss each of these decisions in the following paragraphs.

62.   In summary in Starky, (footnote 33)  the judge mentions that the benefit to be added to the shareholder’s income should be evaluated. He reviewed the two methods of valuation submitted and deemed them both to be reasonable. In this Tax Appeal Board case, the main shareholder of the corporation, Mr. Starky (“Starky”), made personal use of the corporation’s aircraft. Starky had a summer cottage in Jasper and made return flights to the corporation’s headquarters in Edmonton. In the winter, Starky resided in Florida and used the aircraft to travel to Edmonton. The Minister concluded that these flights between Jasper and Edmonton and between Florida and Edmonton were personal in nature and therefore constituted a benefit under subsection 8(1) (now subsection 15(1)) conferred by the corporation. For 1950 and 1951, the log books were not available, so the value of the benefit was set at 25% of the operating costs and CCA for the aircraft. For 1952, 1953 and 1954, the value of the benefit was set using an hourly rate of $15 applied to flight hours involving personal use, which were identified using the log books. The flight hours involving personal use represent roughly 50% of the total flight time. Starky challenged the assessments on the basis that the value of the benefit was excessive. More specifically, for 1950 and 1951 he held that the value was excessive because it took into account the fixed costs relating to the aircraft, in particular the CCA.

After concluding that the flights were personal in nature, the judge said that the benefit should be evaluated. He stated the following:

“ […] Accordingly, the benefit which he received from the use of the company’s plane for the trips back and forth between Edmonton and Jasper, or the appropriation of the company’s plane for his own benefit at such times, was a benefit which falls within the provisions of subsection (1) of section 8 of the Act and upon which a valuation has to be placed in order to arrive at the amount to be added to the appellant’s income in respect thereto.”

The judge rejected Starky’s argument that the CCA should not be included in the value of the benefit for the personal use of the aircraft. The judge concluded, through inference from the decision handed down in Canim Lake (footnote 34) , that because 15% of the use of the aircraft in that case was personal use by the president of the company, 15% of the CCA for the aircraft or 15% of the proportion not allocated to the corporation would be included as the value of the benefit conferred by the corporation on the president in the assessment of his personal income tax.

With respect to the hourly rate of $15 used to calculate the value of the benefit conferred on Starky, the judge concluded that that value was not excessive and was reasonable. He arrived at that conclusion based on the evidence submitted regarding the value of the rental cost on the market of a similar aircraft.

63.   To summarize, in Edward Tercier, (footnote 35)  the judge did not have to determine the value of a taxable benefit; instead, he had to conclude on the principle that the CCA should be included in computing the shareholder’s taxable benefit. This Tax Court of Canada case was heard on common evidence for the company Tercier Motors Ltd (the “Corporation”) and the main shareholder, Mr. Edward Tercier (“Tercier”). For 1976, the Minister denied the Corporation’s operating costs associated with its helicopter based on an hourly rate for the training hours of the Tercier pilot as well as the hours of personal use of the helicopter by Tercier. He established the personal use of the helicopter at 34%. The Corporation was also denied the CCA for the helicopter based on the same percentage. These expenses that were denied to the Corporation had been included in Tercier’s income as a benefit conferred on a shareholder. There was not any disagreement between the parties regarding the method of calculation. However, Tercier argued that the Minister did not have the right to include the CCA in his income as a taxable benefit. Judge Christie concluded that only the expenses regarding the personal use of the helicopter including the CCA should be declined as expenses for the Corporation and taxable as a shareholder benefit for Tercier. The percentage of personal use of the aircraft represented 3.52% of the total flight hours. The training expenses were granted to the Corporation as expenses incurred for the purpose of earning income. In his review, the judge did not comment on the value of the benefit and, drawing on Starky, (footnote 36) , rejected Tercier’s argument that the CCA should be excluded from the taxable benefit.

64.   In Edward Laurence, (footnote 37)  the judge did not attempt to determine the value of the benefit. He mentioned that it was up to the taxpayer to demonstrate that the Minister’s assumptions with respect to the percentages of business use and personal use were erroneous. In our view the judge’s comment on the taxpayer’s burden of proof may also be applied when it is a question of determining the value of a taxable benefit.

Briefly, in this Tax Court of Canada case, the parties agreed that the judge’s conclusions regarding the expenses covered in the appeal by Yorkton Broadcasting Company Limited (footnote 38)  (“Yorkton”) would apply to determine the amount of the benefit conferred on Mr. Edward Laurence (“Laurence”) by Yorkton for personal use of the aircraft. Yorkton had an aircraft for business purposes. For the years in question, Yorkton had deducted the operating costs and the CCA related to aircraft from its revenue. The Minister issued a reassessment to Yorkton for which it considered that for the purposes of paragraph 20(1)(a) and 18(1)(a), the aircraft was used 40% of the time for business and 60% of the time for personal use. Yorkton argued that there was no personal use of the aircraft by Laurence and that the flight hours identified by Laurence for training purposes enable him to gain experience so that he could fly exclusively for business. Yorkton also submitted that based on paragraphs 5 and 7 of Interpretation Bulletin IT-160R2 (footnote 39) , the Minister accepted that a shareholder benefit only exists when personal use exceeds a third of an aircraft’s flight time. The judge held that the Minister’s assessment was appropriate but he did not fully agree on the percentage of personal use by Laurence and that it was not necessary for the Minister to establish this ratio so specifically. He mentioned that it was up to Yorkton to demonstrate that the Minister’s assumptions with respect to the percentages of business use and personal use were erroneous. The judge did not make a reference to Interpretation Bulletin IT-160R2.

65.   Two other court cases specifically relating to aircraft, Mid-West Feed (footnote 40)  and SLX Management  (footnote 41) , are discussed in the “Determining taxable benefits based on expenses denied to the corporation” section.

66.   With the exception of Starky, (footnote 42) , which considered that a benefit should be evaluated (without making references to the FMV), in our view the four other court cases (footnote 43)  that specifically deal with taxable benefits related to personal use of an aircraft do not provide a great deal of insight for your file in determining the value of the benefit.

67.   However, over the last few years, the higher courts in the previously mentioned cases of Youngman (footnote 44)  , Fingold (footnote 45)  , Anthony (footnote 46)  and Spence (footnote 47)  determined that the value of a benefit should be determined based on the FMV of what the taxpayer receives from the corporation. Although these decisions do not specifically deal with benefits relating to the personal use of an aircraft, we are nonetheless of the opinion that they apply to your file. Taking into account these court cases, our view is that Mr. A and Mr. B’s taxable benefit for the personal use of the Aircraft should correspond to the amount that Mr. A and B. would have to spend, in similar circumstances, to receive the same benefit resulting from the use of the Aircraft from an individual dealing at arm’s length.

Determination of the value of a taxable benefit based on the corporation’s expenses

Valuation of the taxable benefit based on operating cost and CCA

68.   You believe that the value of the taxable benefit for Mr. A and Mr. B. should be the corresponding proportion of the personal use of the Aircraft for the operating costs and CCA for Corporation E.

69.   In John Woods, (footnote 48) , the issue involved determining whether a benefit was conferred on the shareholder and, if so, the value of that benefit. Mr. Woods (“Woods”) made an interest-free loan to the corporation so it could acquire a boat. Woods also admitted that the boat had been acquired exclusively for personal use. The corporation did not claim any operating costs or CCA, and Woods personally paid for all operating costs. The assessment for a taxable benefit was issued based on the rate of return of the capital cost of the property. During the hearings, the Minister attempted to show that the value of the benefit should have been determined based on the fair rental value of the property, which would have resulted in a much higher assessment. Judge Cardin confirmed the assessment as issued, namely a benefit calculated on the basis of the rate of return of the capital cost of the property.

In its analysis, the Court argued for the principle of fair rental value to determine the value of a benefit, even though the Minister assessed based on a lower value. Moreover, while taking into account Houle, (footnote 49) , Judge Cardin brought up the fact that even if the method based on operating costs and CCA is correct in some circumstances, this method is not necessarily the best or the only acceptable method for determining the value of benefit when there is neither an allocation of the capital cost nor any operating costs deducted by the corporation, even though there was a benefit conferred on the shareholder. He made the following comments:

“It is my understanding that in those circumstances, that is a part-time personal use of a yacht, the Minister of National Revenue considered that the proper method of evaluating the benefit was by allocating operating costs.  It appears evident from Mr Justice Collier’s remarks that if it is clear that Mr Houle had received a taxable benefit from the personal use he made of the yacht, the formula to be used in determining a value for that benefit is not at all clear and the law on that point is in my view as yet unsettled.

Although, an evaluating formula based on operating costs and capital cost allowance may well be correct under certain circumstances, it is not necessarily the best nor the only acceptable method of computing the value of benefits such as we have here where there is no capital cost allowance and no operating costs, although there is a conferred benefit on the taxpayer.”

70.   The judge’s considerations lead us to conclude that a method for valuation of the benefit based on operating costs and CCA can be suitable in various circumstances as long as it is close to the FMV.

Determination of the taxable benefits based on expenses denied to the corporation

71.   In Mid-West Feed , (footnote 50) , Mr. Mailhot (“Mailhot”) was the sole shareholder of the “Mid-West” corporation. Mid-West had a boat it used to promote its business by hosting clients and providers. The boat was sold and replaced with a four-seater plane, which was then replaced with a six-seater Cessna. Mailhot took flying lessons so he could get his pilot’s license. He assumed the entire cost of the flying lesson himself. Moreover, Mailhot paid all of the expenses related to the boat. Mid-West did not claim CCA for the planes and boat. For the years in question, Mid-West claimed capital losses resulting from the disposition of a boat and a plane. The Minister did not allow Mid-West to deduct these losses on the grounds that these assets were mainly acquired for Mailhot’s personal use and were “personal-use property” under the former paragraph 54(f). The Minister also added a taxable benefit to Mailhot as a benefit conferred by Mid-West for the personal use of the boat and the planes (“Assets”), the value of which was calculated using the capital cost multiplied by the prescribed rate prorated to personal use. The issue involved determining whether Mid-West’s Assets were “personal-use property.”

The Tax Court of Canada initially rejected the presumption that the Assets were “personal-use property” and concluded that the Assets were used for business purposes by Mid-West and granted the capital losses claimed. For 1979 to 1981, the judge concluded that the percentage of personal use of the Assets represented respectively to 44%, 15.3% and 48.5%. Furthermore, a benefit for the personal use of the aircraft was not added to Mailhot’s income because he assumed 77.8% of the aircraft operating costs, which was higher than the percentage of personal use of the aircraft. With regard to the taxable benefit for the use of the boat, the Court held that a benefit should not be attributed to Mailhot for the use of the boat because he had paid all of the expenses related to it and Mid-West had not claimed CCA. In his review, the judge emphasized that a corporation’s non-deductible expenses are not necessarily converted into a benefit for the shareholder. The judge stated the following:

“ Outlays or expenses incurred by a taxpayer are deductible only to the extent that they were incurred for the purpose of earning income from a business or property as provided in paragraph 18(1)(a). If they are not deductible because they do not meet this test, it does not necessarily follow that they convert into a benefit to a proprietor of a business or shareholders of a corporation.”

72.   Conversely, the Tax Court of Canada concluded in SLX Management (footnote 51)  that expenses recognized as personal in nature were not deductible for the corporation and that they therefore constituted benefits conferred on a shareholder or indirect payments made to the shareholder.

In that court case, the appeals filed by SLX Management Inc. (“Management”) and its sole shareholder, Mr. Miller (“Miller”), were heard on common evidence. The issue in the Management appeal was the deductibility of various expenses, specifically the operating costs and CCA claimed for the aircraft. In the “Issues” section, Judge Rossiter stated the following regarding Miller’s appeal: “If any of the expenses claimed by Management as deductible are not properly deductible, were they shareholders’ benefits under subsection 15(1) of the Income Tax Act or under section 56(2) of the Income Tax Act and therefore attributable to the Appellant Miller?” In the list of issues, the judge did not mention that the value of the benefit had to be evaluated.

Management had an aircraft and used it extensively to travel across North America for potential business. It deducted various aircraft operating costs. With regard to the use of the aircraft, Miller maintained a log of flights and used this record to calculate personal trips attributable to him as a shareholder’s benefit. The Minister denied the deduction of various aircraft operating costs as well as the CCA because in his views, they were personal costs. Following a comprehensive review of each flight, the judge found that various trips were personal in nature and that the related costs were not deductible. He noted that the CCA was deductible in the same proportion as the aircraft expenses. For the three fiscal years in question, the percentage of personal use of the aircraft increase to 60%, 52% and 51%. With regard to Miller’s appeal, Judge Rossiter concluded as follows:

“ [95] With respect to the expenses in the Management appeal, the results of those finding on expenses flows directly to the Miller appeal. Where I have found expenses not to be for the purposes of gaining or producing income, they are held to be shareholder benefits or indirect payments to Miller in amounts as apportioned above.” 

73.   The judge’s decision in the Miller appeal does not address the notion of the “value” of a benefit that based on the aforementioned decisions, specifically Youngman (footnote 52)  and Anthony (footnote 53) , should approximate the FMV of the benefit received. The judge did not carry out an analysis to conclude that the expenses denied to Management were a reflection of the value of the benefit conferred on Miller, i.e., the cost Miller would have paid a corporation of which he was not a shareholder for the same benefit.

74.   Since the judge in SLX Management  (footnote 54)  did not explain his reasoning behind including a benefit evaluated based on Management’s denied expenses in Miller’s income, we are of the opinion that the judge’s decision in this court case will not be useful to you to resolve this issue.

75.   Moreover, Judge Létourneau’s comments in Spence (footnote 55)  are indeed relevant. These comments explain why using expenses denied to a corporation instead of the FMV to determine the value of a benefit may in some cases be unfair for the taxpayers. The judge indicated that the cost of the product or service assumed by the employer in no way affects the value of the benefit provided to the employee and that this method based on costs to the employer may be unfair. He stated the following:

“ [20]       Counsel for the appellant argued that the costs to the school depend on many factors such as efficiency, overhead, suppliers, etc. which, I agree, “are irrelevant and have no impact on the value of the taxable benefit enjoyed by the respondents”: appellant’s memorandum of fact and law, at paragraph 26. He provides the following hypothetical example which, I think, also illustrates the unfairness of treatment if the cost method is used:

The tuition in three schools if $10,000. Each offers the same benefit of a $5,000 discount to their employees. The cost per student for one school is $5,000, the other is $10,000 and the last one is $11,000. According to the cost approach taken by the trial judge, the value of the discount would be $0, $5,000 or $6,000, even though each recipient enjoyed the same benefit.”

76.   The question of whether the value of the benefit conferred on a taxpayer should be calculated by attributing to it the same amounts as the denied expenses to the corporation will always be a question of fact. In light of the aforementioned case law, we are of the opinion that the value of the taxable benefit should approximate the FMV of the benefit received. Consequently, the expenses denied to the corporation can be used to determine the value of a taxable benefit insofar as this value approximates the FMV.

77.   Therefore, in this file, in our view the aircraft operating costs and the CCA denied to Corporation E can be used to establish the value of the benefit conferred on Mr. A and Mr. B., to the extent that it can be demonstrated that this value approximates the FMV of the benefit received.

General use of interpretation bulletins

78.   In this file, you and the taxpayer disagree on the use of Bulletin IT-160R3. The taxpayer feels that the guidelines in Bulletin IT-160R3 are valid for the years under audit. You, on the other hand, believe that Bulletin IT160R3 should not be applied because it was archived during the years under audit.

79.   Interpretation bulletins are simply the CRA’s opinion, do not bind the CRA, the taxpayer or the courts, and are only an important factor in the interpretation of the Act in cases where there is uncertainty regarding the meaning of the legislation. In this respect, in the Mattabi Mines (footnote 56)  case, which is a decision from the Supreme Court of Canada, Judge Wilson stated the following:

“Crucial to a resolution of this issue is an understanding of the legal effect of administrative practice as publicized in Interpretation Bulletins. As already mentioned, the latter are not authoritative sources for the interpretation of taxing statutes. As Cattanach J. put it in Southside Car Market Ltd. v. The Queen, [1982] 2 F.C. 755 (T.D.), at p. 770, “an interpretation is not law until so interpreted by a court of competent jurisdiction”. The same judge noted in Stickel v. Minister of National Revenue, [1972] F.C. 672 (T.D.), at p. 684, that “[t]he Deputy Minister does not have the power to legislate”. Interpretation Bulletins, however, do have some persuasive force where there is an ambiguity in the legislation. In Harel v. Deputy Minister of Revenue of Quebec, [1978] 1 S.C.R. 851, this fact was recognized […]”

80.   Interpretation bulletins provide the CRA’s technical interpretation of tax legislation. They do not have force of law, so you are not bound by their content. During the period in which an interpretation bulletin is archived, you can consult it to the extent that it applies to your file. However, you should also take into account court decisions handed down after its publication date in order to gauge the relevance of information contained in the bulletin. Also, when a bulletin is cancelled, it should no longer be used.

81.   Bulletin IT-160R3, which was published on February 19, 1992, was archived in 2002 with the following notice: “This publication is archived and kept for historical purposes. Caution should be used when you refer to it, since it reflects the law in force at the time it was released.” Bulletin IT-160R3 was archived because it was rarely consulted on the CRA website and there were few questions regarding its content. We are of the opinion that you can continue to consult Bulletin IT-160R3 for the CRA’s interpretations of federal income tax legislation for the period during which the bulletin is archived. However, you should take into account the caution that applies and the court decisions handed down after it was published.

82.   On September 30, 2012, in conjunction with the income tax folio initiative, the income tax interpretation bulletins already archived were cancelled. Consequently, since that date, the guidelines from Bulletin IT-160R3 no longer apply.

Use of Bulletin IT-160R3

83.   You requested our comments for guidance on which method to use to calculate the value of the taxable benefit for your file. In this regard, you identified two alternatives that are suggested in Bulletin IT-160R3 for cases where employees or shareholders use an aircraft for personal flights. The first method is based on the cost of a plane ticket as outlined in paragraph 3 of Bulletin IT-160R3: “[…] The value of such a benefit is normally considered to be the cost of a regular first class airfare (not a discounted, charter class or advance booking fare for a regularly scheduled flight to the same destination. […]”. The second method is outlined in paragraph 5 of Bulletin IT‑160R3.

84.   That paragraph contains the following CRA general guideline:     

“5. In certain cases, even if the aircraft is owned or leased primarily for business purposes, the overall amount of personal use of an aircraft may be so extensive that, in relation to the costs of operating the aircraft, the equivalent first class airfare for each passenger on the flight would be an unreasonably low valuation of the benefit (As a general guideline, personal use amounting to one-third of the total flying time will be regarded as “extensive”; see example below). In other cases, for example if an employee or shareholder is accompanied by many friends or relatives on a particular flight, a comparison to commercial airfares might result in an unreasonably high valuation. In such situations, the value of the benefit derived from the use or availability of the aircraft is considered to be the lesser of the following amounts:

(a) the amount that it would have cost the individual to charter a comparable aircraft at the current commercial rate for the time of personal use, including any flat fee plus all other related costs normally incurred, or
(b) the costs of operation of the aircraft in proportion to the amount of personal use by the individual (including a share of leasing, acquisition and financing costs, as well as fuel, flight and ground crew, catering expenses, maintenance, insurance and hangar or parking costs, etc.) 

         […] ”

85.   In the situation under review, and based on the personal use of the Aircraft determined at XXXXXXXXXX%, XXXXXXXXXX% and XXXXXXXXXX% for each of the years in question, we understand that you are concerned with the 33.33% personal use mentioned in paragraph 5 of Bulletin IT‑160R3.

86.   We must consider that paragraph 5 of Bulletin IT-160R3 only applies if the method of determining the value of the benefit based on the cost of an equivalent first-class ticket compared to the aircraft operating costs yields a value too low to represent a reasonable valuation of the benefit. The other methods proposed in paragraph 5 to determine the value could be considered, as long as they are reasonable under the circumstances and provide with a value comparable to the FMV.

87.   Furthermore, as the CRA points out in paragraph 1 of Bulletin IT-160R3, the method of determining the value of a taxable benefit for the personal use of an aircraft must be established based on what is reasonable under the specific circumstances of the case. Additionally, the guidelines in Bulletin IT-160R3 may not apply to every situation and, consequently, could result in the creation of benefits that aren’t reasonable under the circumstances. Paragraph 1 of Bulletin IT-160R3 states the following:

“1. A taxpayer who uses, for personal purposes, an aircraft that is either owned or leased by the taxpayer’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 a position as a shareholder, the value of the benefit is included in income by paragraph 6(1)(a) or subsection 15(1), respectively. The valuation of the taxable benefit is determined on the basis of what is reasonable in relation to the facts of each case and the purpose, whether business or personal, for which the aircraft is owned or leased. The taxpayer should maintain adequate records, logs or other evidence to substantiate claims that particular instances of travel by the aircraft, and travel by the passengers on that aircraft, were for business rather than personal reasons. The comments below set out some general guidelines, but may not be applicable to all situations.  […] ”

88.   According to paragraph 1 of Bulletin IT-160R3, the CRA seeks to determine the FMV of the benefit received. This paragraph uses the term “value,” a term that is not defined in the Act. However, for the purposes of determining the value of a taxable benefit, it is generally considered by the CRA as being the FMV. Moreover, this stance taken by the CRA corresponds to the case law trend outlined in the sections dealing with the value of a benefit under subsection 15(1) and paragraph 6(1)(a).

89.   When the notion of “reasonable” is addressed in Bulletin IT-160R3, it must be read in relation to FMV. As mentioned in paragraph 4 of Bulletin IT-470R (footnote 57) , “ […] The value placed on this benefit should approximate its fair market value. […] ”. 

90.   Determining the value of a taxable benefit based on what is reasonable compared to the FMV is a question of fact that can only be resolved after a comprehensive analysis of the facts surrounding the specific situation. As mentioned in paragraph 1 of Bulletin IT-160R3, the value of the taxable benefit is determined based on what is reasonable. The test to establish what is reasonable should be linked to the FMV of the benefit. The guidelines provided in Bulletin IT-160R3 also seek to obtain a reasonable valuation of the benefit. Were a taxpayer to use the guidelines from Bulletin IT-160R3 to establish the value of a taxable benefit and the result was not reasonable, the CRA would not take into account Bulletin IT-160R3.

91.   We are of the opinion that paragraph 5 of Bulletin IT-160R3 does not apply to your situation because the percentages of personal use of the Aircraft were below the  “One third” guideline. Furthermore, we believe that compared to the Aircraft operating costs, using the cost of a normal first-class ticket (as mentioned in paragraph 3) would yield a number too low to represent a reasonable valuation of the benefit. Therefore, the guidelines from paragraph 3 and 5 of Bulletin IT-160R3 do not apply to your situation. We recommend that you follow paragraph 1 of Bulletin IT-160R3 to determine the value of the benefit based on what is reasonable, given the specific circumstances of your case. In other words, the value of the benefit for the personal use of the Aircraft should be determined based on the FMV of the benefit received.

92.   The taxpayer requested “tax relief” that would allow the value of the benefit to be calculated based on the cost of a regular first-class ticket. In our opinion, Bulletin IT‑160R3 does not grant any “tax relief” to determine the value of a benefit for the personal use of an aircraft. Bulletin IT-160R3 provides the guidelines for determining the FMV of a benefit, which should be added to the income of the taxpayer who receives this benefit as an employee or a shareholder.

Case law and Bulletin IT-160R3

93.   You contend that Bulletin IT-160R3 should not be followed because it does not reflect the position of the courts in decisions involving the personal use of an aircraft, particularly the decisions in Starky (footnote 58) , Edward Tercier (footnote 59) , Edward Laurence (footnote 60) , Mid-West Feed (footnote 61)  and SLX Management. (footnote 62)   Following your analysis, you mention that in all of these court decisions the same method was applied, namely that the expenses denied to a corporation that correspond to the aircraft operating costs, including the CCA, multiplied by the percentage of personal use by the shareholder, represent the amount of the shareholders taxable benefit. You also mention that the courts never applied Bulletin IT-160R3.

94.   Based on the information we collected, the decisions handed down by the courts that you mentioned in your memo (with the exception of SLX Management (footnote 63)  in 2010) were all taken into account in Bulletin IT-160R3. In this regard, using our archived files, we reviewed the support documentation that underpinned the drafting of Bulletin IT-160R3.

95.   As you pointed out, Bulletin IT-160R3 was not applied by any of the judges in the aforementioned court decisions. The Yorkton Broadcasting Company Limited (footnote 64) case, upon which the judge in Edward Laurence (footnote 65)  based his decisions, is the only Court decision in which the taxpayer invoked the previous version of Bulletin IT-160R3 but for which the judge did not extend any consideration.

Deductible expenses for a corporation

96.   In general, subsection 9(1) allows a corporation to deduct expenses incurred in order to earn business or property income as long as the expenses are reasonable under the circumstances. However, paragraph 18(1)(a) prohibits a corporation from deducting expenses incurred as the result of personal use of property it owns because they were not incurred for the purposes of earning income.

97.   However, expenses regarding benefits conferred on employees are generally deductible insofar as it can demonstrated that, among other things, they were incurred in order to earn business or property income and that they are reasonable under the circumstances. Conversely, expenses related to benefits conferred on shareholders are not deductible from the corporation’s revenue. (footnote 66) 

98.   Moreover, in accordance with paragraphs 13(7)(c) and (d), the capital cost of the property must be distributed annually between its use for earning income and its use for other purposes. Consequently, when the property is used for business purposes and personal purposes, the CCA may only be determined using the proportion of the capital costs related the use of the property for earning income.

Conclusion

99.   In our opinion, case law developments over the last few years support our position that the value of the taxable benefit for the personal use of an aircraft should be determined based on the FMV of the benefit and should be reasonable under the specific circumstances. Among other things, the FMV corresponds to the amount the shareholder would have paid under similar circumstances to receive the same benefit from a corporation of which he was not a shareholder.

100.  We are of the opinion that there is no absolute rule concerning the method to use to determine the value of the benefit. Determining the value of a benefit based on the operating costs and CCA related to the personal use of the aircraft is adequate, as long as this method yields a value that is reasonably close to the FMV of the benefit received.  

101.  If necessary, we invite you to consult CRA appraisers to determine the FMV of the benefit, since establishing this value is not part of the mandate of the ITRD.

102.  For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library.  A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity.  Requests for this latter version should be e-mailed to: LPRA-PLAR ITR-DDI Access Team-Équipe d’Accès.   In such cases, a copy will be sent to you for delivery to the taxpayer.

We hope that our comments were useful.

Original in French signed by:
Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  CANADA REVENUE AGENCY, Interpretation Bulletin IT-160R3, “Personal use of aircraft”, February 19, 1992.
2  Consultants Pub Création Inc .v. Canada, 2008 FCA 60.
3  Massicotte  v. The Queen, 2004 TCC 558.
4  Massicotte v. The Queen, 2006 TCC 618.
5  Consultants Pub Création Inc. v. Canada, 2008 FCA 60.
6  Massicotte v. The Queen, 2006 TCC 618.
7  Kennedy v. Canada, [1973] F.C. 839.
8  Anthony v. The Queen, 2010 TCC 533.
9  Schroter v. Canada, 2010 FCA 98.
10  Youngman v. The Queen, 90 DTC 6322 (FCA).
11  Author’s note: At the time of the Youngman decision, paragraph 15(1)(c) specified that benefits conferred on shareholders by the corporations had to be included in the shareholder’s income..
12  Youngman v. The Queen, 90 DTC 6322 (FCA).
13  Henderson Estate et al v. MNR, 73 DTC 5471 (TCC) confirmed by Collings Estate v. MNR, 75 DTC 5332 (FCA).
14  CANADA REVENUE AGENCY, Information circular 89-3, “Policy Statement on Business Equity Valuations”, August 25, 1989.
15  Youngman v. The Queen, 90 DTC 6322 (FCA).
16  Youngman v. The Queen, 90 DTC 6322 (FCA).
17  Canada v. Fingold , [1998] 1 RCF 406 (FCA), see also Servais v. Canada,  2003 FCA 329 and Arpeg Holdings Ltd. v. Canada,  2008 FCA 31.
18  Youngman v. The Queen, 90 DTC 6322 (FCA).
19  This excerpt is already quoted in Paragraph 47.
20  Youngman v. The Queen, 90 DTC 6322 (FCA).
21  Canada v. Fingold , [1998] 1 FCR 406 (FCA).
22  The Queen v. Fingold, 97 DTC 5449 (TCC).
23  Canada v. Fingold , [1998] 1 RCF 406 (FCA).
24  Anthony v. The Queen, 2010 TCC 533.
25  Schroter v. Canada, 2010 FCA 98.
26  Anthony v. Canada, 2011 FCA 336
27  Canada v. Spence, 2011 FCA 200.
28  Spence v. The Queen, 2010 TCC 455.
29  Canada v. Spence, 2011 FCA 200.
30  Schroter v. Canada, 2010 FCA 98. These excerpts is already quoted in Paragraph  56.
31  Anthony  v. Canada, 2011 FCA 336.
32  Canada v. Spence, 2011 FCA 200.
33  Starky v. MNR, 61 DTC 360.
34  Canim Lake Sawmills Ltd v MNR, 61 DTC 1035 (Exchequer Court).
35  Tercier et al v MNR, 84 DTC 1620 (TCC).
36  Starky v. MNR, 61 DTC 360.
37  Edward Laurence v. MNR, 87 DTC 173 (TCC).
38  Yorkton Broadcasting Company Ltd v. MNR, 87 DTC 165 (TCC).
39  CANADA REVENUE AGENCY, Interpretation Bulletin IT-160R3, “ Personal use of aircraft”, March 23, 1981.
40  Mid-West Feed Ltd v. MNR, 87 DTC 394 (TCC).
41  SLX Management Inc. v. The Quuen, 2010 TCC 148.
42  Starky v. MNR, 61 DTC 360.
43  Tercier et al v MNR, 84 DTC 1620 (TCC), Edward Laurence v. MNR, 87 DTC 173 (TCC), Mid-West Feed Ltd v. MNR, 87 DTC 394 (TCC), SLX Management Inc. v. The Queen, 2010 TCC 148.
44  Youngman v. The Queen, 90 DTC 6322 (FCA).
45  Canada v. Fingold , [1998] 1 RCF 406 (FCA).
46  Anthony  v. Canada, 2011 FCA 336.
47  Canada v. Spence, 2011 FCA 200.
48  John Woods v. MNR, 85 DTC 479(TCC).
49  The Queen v. Houle, 83 DTC 5430 (FC).
50  Mid-West Feed Ltd v. MNR, 87 DTC 394 (TCC).
51  SLX Management Inc. v. The Queen, 2010 TCC 148.
52  Youngman v. The Queen, 90 DTC 6322 (FCA).
53  Anthony v. Canada, 2011 FCA 336.
54  SLX Management Inc. v. The Queen, 2010 TCC 148.
55  Canada v. Spence, 2011 FCA 200.
56  Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 RCS 175.
57  CANADA REVENUE AGENCY, Interpretation Bulletin IT-470R, “ Employees’ Fringe Benefits”», August 11,  1999.
58  Starky v. MNR, 61 DTC 360.
59  Tercier et al v MNR, 84 DTC 1620 (TCC).
60  Edward Laurence v. MNR, 87 DTC 173.
61  Mid-West Feed Ltd v. MNR, 87 DTC 394 (TCC).
62  SLX Management Inc. v. The Queen, 2010 TCC 148.
63  SLX Management Inc. v. The Queen, 2010 TCC 148.
64  Yorkton Broadcasting Company Ltd v. MNR, 87 DTC 165 (TCC).
65  Edward Laurence v. MNR, 87 DTC 173.
66  CANADA REVENUE AGENCY, Interpretation Bulletin IT-432R2 “ Benefits Conferred on Shareholders  ”, February 10, 1995, par. 14.

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