By Ken Pole | October 20, 2017 Estimated reading time 6 minutes, 21 seconds.
The Canada Revenue Agency (CRA) and the business aviation community could be just days away from resolving a long-running dispute over how the use of corporate aircraft is taxed.
Although the discussion has been evolving over several years, as the CRA published a series of income tax bulletins, the Canadian Business Aviation Association (CBAA) and its members suddenly found themselves having to deal with a new assessment policy which dramatically changed how the taxable benefit was calculated.
CBAA president Rudy Toering told Skies that while he and others have continued to talk regularly with CRA officials and “have made progress on a few items,” they are increasingly concerned “about how long this is dragging out.”
The biggest outstanding issue is that the CRA has given the industry only verbal assurances during a two-hour meeting; there is nothing in writing.
That being said, ongoing weekly conversations with senior CRA officials could see what Toering hoped will be “some more solid resolutions” of the situation when the two sides meet again Oct. 27.
“The CRA has stated that it will meet with us again. . . to outline the changes it intends to make to its proposed administrative policy,” he said in an Oct. 19 email to the CBAA membership. “CRA will then schedule a wider stakeholders’ conference call with industry representatives and members of the tax community in mid-November. Following that call, the CRA has committed to releasing its administrative policy in writing by the end of November 2017.”
The CRA said in August that it would apply its proposed policy retroactively but has now decided it would be applied only to taxpayers audited after the policy is published, said Toering. Calling that a “positive note,” Toering added the CBAA nevertheless remains concerned about “the gateway concept” through which auditors determine how certain taxpayers would be treated under the policy.
The CRA’s policy is that when the person using the aircraft is the same one who controls access, calculating the value of that use for income tax purposes would include an amount equal to their share of variable operating costs and fixed costs for the calendar year. This amount would exclude depreciation, capital cost allowance and interest, according to a CBAA briefing note.
An amount equal to the prescribed rate of interest on the original capital cost of the aircraft would also be added to the person’s income. This amount would be pro-rated based upon their number of flying hours for personal use versus business use during the calendar year.
The CBAA’s lawyer, Jamieson Collins, has outlined the potential personal income tax fallout. In a September letter to the CRA, Collins gave as an example a $32-million aircraft which costs $1 million annually to operate and which is flown 80 hours a year for business use and 20 hours for personal use.
The proposed policy could mean that the value for income tax purposes would work out to $29,200 for each flight hour of personal use. An annual liability of $584,000, it could include $200,000 (the 20 hours of use equaling 20 per cent of annual operating costs) and $384,000 (a 20 per cent share of six per cent interest on the aircraft’s original $32 million capital cost).
“We have had numerous discussions with the CRA outlining the unfairness of this aspect of the administrative policy and provided them with a detailed legal submission explaining why the policy is unsustainable,” Toering said in his email to the membership.
Meanwhile, he explained to Skies, “we continue in a very cooperative spirit . . . to make sure that they fully understand the impact of any direction that they take.”
To underscore its position, the CBAA has published an economic impact statement in which it said the direct ongoing annual effect of business aviation’s presence in Canada includes 23,000 full-time equivalent (FTE) jobs, $2.3 billion in wages, and $3.4 billion in gross domestic product (GDP).
With indirect impacts factored into the equation, the total of FTE jobs more than doubles to 47,100; wages increase to $3.5 billion; and GDP to $5.8 billion.
“We certainly do not want to put jobs or revenue at risk at original equipment manufacturers such as Bombardier or Pratt and Whitney, as well as other suppliers which contribute to the final product, for the sake of a bit more money from personal income tax,” said Toering.
It’s no secret that the continued unpredictability surrounding how their aircraft usage will be taxed has resulted not only in some companies delaying orders for new aircraft, but has also forced one operator to shut down its flight department for the time being.
“The fact is, if you damage a sector such as ours, the impact on jobs overall would be quite severe,” Toering pointed out. “The average salary in Canada is $49,700 a year, but our average is $80,600.”
The implication is that if jobs are lost, income tax revenues decline.
There has been damage already but the CBAA president said it’s likely reversible, “if we can come up with a policy that is fair and respects the fact that this is a viable business.”
