Space Travel And Taxes: A Cautionary Tale Of Shareholder Benefits

• Published date: 28 July 2020
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Income Tax, Shareholders
• Law Firm: Bennett Jones LLP
• Author: Ms Allyson Cairns-Walji and Anu Nijhawan

In the recent decision in Laliberté v Canada, 2020 FCA 97 [Laliberté] the Federal Court of Appeal confirmed that the $41.8-million costs of a shareholder's visit to outer space as a "space tourist" should be taxed as a shareholder benefit, and not as a deductible marketing expense as was claimed by the shareholder and the company, Cirque du Soleil. While the circumstances of that case are unusual and exotic, the case illustrates that the shareholder benefit rules should be considered any time a shareholder receives an economic benefit from the corporation because of their position as a shareholder.

The Income Tax Act (ITA) includes a shareholder benefit regime, which is intended to ensure that a shareholder is subject to tax on any economic benefit received from a corporation, subject to certain specified exclusions for bona fide business transactions, certain reorganizations, rights offerings, dividend payments, and capital reductions. The provisions have a broad scope, with the Canada Revenue Agency (CRA) stating that a shareholder benefit may arise from "just about any payment appropriation of property or advantage conferred on a shareholder by the corporation."

The consequence of a shareholder benefit is significant: the value of the benefit is included in the shareholder's income for the year as regular income (taxed at a higher rate than a dividend), but the ITA does not allow a corresponding deduction to the corporation'thus resulting in an element of double tax. For non-resident shareholders, the ITA deems the benefit to be a dividend to which the normal non-resident withholding tax rules apply.

When Is a Shareholder Benefit Taxable?

ITA subsection 15(1) includes in a shareholder's income the amount or value of a benefit conferred on the shareholder by a corporation. The key issues are thus determining whether a "benefit" exists, whether such benefit has been "conferred," and how to determine the amount of the benefit.

Benefit

The term "benefit" is not defined in the ITA but is broad and can include any type of payment or advantage to a shareholder that is outside of the ordinary course of business. In the view of the CRA, "benefits" include:

• a payment by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction;
• an appropriation of a corporation's funds or other property in any manner whatever to, or for the benefit of, a shareholder; or
• any other benefit or advantage conferred on a shareholder by a corporation.

In Laliberté, the Federal Court of Appeal noted that the analysis often focuses on whether or not the transaction in question was made for a business or personal purpose.

Conferral of a Benefit

Notably, the existence of an economic benefit does not necessarily mean that the shareholder has received a taxable benefit. The benefit will...