Navigating Tax Implications for Private Aircraft Ownership in Canada

Introduction

Owning a private aircraft in Canada offers unparalleled convenience and flexibility, but it comes with a myriad of tax considerations. This article delves into the intricacies of private aircraft ownership in Canada, shedding light on crucial tax aspects, including recent changes such as the introduction of the Luxury Tax. This information is particularly vital for high-net-worth individuals, business owners, and entrepreneurs.

Business Expense Deduction

Canadian tax regulations allow for the deduction of reasonable and necessary operating costs associated with private aircraft used for business purposes. Demonstrating the relevance of these costs to business activities is essential. Factors such as time efficiency, increased productivity, and safety considerations play a pivotal role in establishing the reasonableness of these deductions. So, if you can reasonably show a link between your business revenue and expenses, chances are they will be deductible.

Personal Use of Company Aircraft

Recent changes in CRA policies underscore the importance of meticulous record-keeping for personal use of company aircraft by shareholders and employees. Nonbusiness use of the aircraft is a taxable benefit to the shareholders and employees which would be included with their personal income. The valuation of taxable benefits has shifted to fair market value. This valuation considers what a shareholder or employee would reasonably pay for a similar benefit from an arm's length party. So, it is advisable to consider the personal use of aircraft before travel.

Computation Methods for Personal Use

The CRA provides specific scenarios for computing taxable benefits arising from personal use:

Scenario 1: Business and Personal Use

In situations where a shareholder or employee takes a flight for both business and personal purposes, generally there is no taxable benefit. However, if another shareholder or employee takes the same flight for personal reasons, they incur a taxable benefit equal to the highest priced ticket to the destination.

Example: A senior executive travels to Europe for a professional conference with their family. If the family's purpose is not unequivocally for business, the executive incurs a taxable benefit equal to the highest priced ticket for each family member on the flight.

Scenario 2: No Business Purpose

If a shareholder or employee takes a flight with no business purpose, the taxable benefit is equal to the price of chartering an equivalent aircraft for an equivalent flight.

Example: An executive uses the company aircraft for a vacation trip to Europe. The taxable benefit is equivalent to the charter price for that trip.

Scenario 3: Primary Personal Use

When a shareholder or employee uses the aircraft primarily for personal purposes relative to its total use during the calendar year, they incur a taxable benefit equal to the personal use portion of the aircraft's operating costs plus an available-for-use amount.

Example: If a shareholder uses the company aircraft for personal use 50% or more of its total use, they recognize a taxable benefit based on the personal use portion of the operating costs plus an available-for-use amount.

Imputing Income

In cases of personal, non-business use of a company aircraft, CRA requires imputing fringe benefit income to reflect the value of the transportation. Detailed records are indispensable to distinguish between business and personal use accurately.

Deductible Expenses

Expenses related to personal use of the aircraft are generally not deductible for the corporation if conferred on account of shareholdings. However, for personal use by employees, deductions may be allowable if expenses are incurred to earn income from business or property and are reasonable.

Capital Cost Allowance (CCA)

The capital cost of the aircraft must be distributed annually between business and personal use, affecting the calculation of capital cost allowance. CCA is determined based on the proportion of capital costs related to earning income, emphasizing the importance of accurate record-keeping.

Luxury Tax

Luxury Tax applies to new cars, aircraft, and vessels with retail sales prices exceeding specific thresholds. The tax, effective from September 1, 2022, is calculated at the lesser of 20% of the value above the set threshold and 10% of the full value of the subject item.

Subject Items and Thresholds

• Vehicles: Passenger vehicles suitable for personal use, with a retail sales price over $100,000.
• Aircraft: Any aircraft with a maximum carrying capacity of fewer than 40 seats, manufactured after 2018, and priced over $100,000.
• Vessels: Leisure vessels designed for recreation, manufactured after 2018, and priced over $250,000.

Who Pays Luxury Tax

Registered vendors will pay the Luxury Tax on sales exceeding the price thresholds. Exemptions apply to sales to manufacturers, wholesalers, and registered retailers. Non-registered importers will pay the tax on imported subject items.

Calculation and Effect

Luxury Tax is calculated as the lesser of 20% of the value above the threshold or 10% of the full value. The tax applies at the point of purchase, impacting final sale prices exceeding the thresholds. Hence, the buyer ultimately pays the luxury tax.

Effective Date

The Luxury Tax applies to subject items delivered or imported on or after September 1, 2022. Exceptions are made for agreements made in writing before January 1, 2022.

Let's explore the tax implications for individuals/entities considering the purchase of private aircraft in different price ranges, using examples of a $5 million and a $20 million plane.

Example 1: $5 Million Private Aircraft

Assumptions:‍

- Purchase Price: $5,000,000

- Business Use: 60%

- Personal Use: 40%

- Luxury Tax Not Applicable (Assuming below the threshold. Check limits for accurate calculations)

- Operating Costs: $1,000,000

Business Expense Deduction:

Deductible Operating Costs: $1,000,000 * 60% = $600,000

Imputing Income: To be included in personal income

Personal Use Imputed Income: Based on highest priced ticket for a comparable aircraft

Amortization Expense (CCA):

Business Portion of Purchase Price: $5,000,000 * 60% = $3,000,000

CCA: $3,000,000 * applicable CCA rate

Example 2: $20 Million Private Aircraft

‍Assumptions:

- Purchase Price: $20,000,000

- Business Use: 70%

- Personal Use: 30%

- Subject to Luxury Tax (check limits for accurate calculations)

- Operating Costs: $2,500,000

Business Expense Deduction:

Deductible Operating Costs: $2,500,000 * 70% = $1,750,000

Imputing Income: To be included in personal income

Personal Use Imputed Income: Based on highest priced ticket for a comparable aircraft

Amortization Expense (CCA):

Business Portion of Purchase Price: $20,000,000 * 70% = $14,000,000

CCA: $14,000,000 * applicable CCA rate

Luxury Tax Calculation:

Excess Value: $20,000,000 - $100,000 (Luxury Tax Threshold) = $19,900,000

Luxury Tax (10%): $19,900,000 * 10% = $1,990,000

Conclusion

‍Private aircraft ownership in Canada involves navigating a complex landscape of tax implications. Recent changes, including the introduction of the Luxury Tax, add an extra layer of consideration. Seeking guidance from qualified tax professionals is crucial to ensure compliance with Canadian tax laws and to optimize the tax position of private aircraft owners in this evolving regulatory environment.

The examples in this article are for illustration purposes only and may not accurately reflect individual tax situations. Tax laws are subject to change, and specific circumstances can vary. The calculations are general and should not be used for financial decisions. Readers should consult qualified tax professionals for personalized advice and to ensure compliance with current tax regulations. The author and publisher disclaim liability for decisions based on the information in these examples.

If you’d like to learn more or have questions about an aircraft purchase, please reach out to us at help@futurecpa.ca.