Aircraft orders on hold due to taxation uncertainty: CBAA

Avatar for Ken PoleBy Ken Pole | December 18, 2017

Estimated reading time 6 minutes, 30 seconds.

As the Canadian Business Aviation Association (CBAA) continues negotiations with the Canada Revenue Agency (CRA) about its plans for an explosive increase in the taxation of business aircraft for personal use, the economic fallout is evidently spreading.

Business jet in flight
The Canadian Business Aviation Association says jet purchases are being put on hold until rules about the taxation of business aircraft for personal use are worked out. Eric Dumigan Photo

CBAA chief executive officer Jim Facette, fresh from a meeting with senior CRA officials, said he knows “for a fact” that at least $300 million in orders for new aircraft is on hold because operators are uncertain about how their use for personal purposes will be taxed. Anecdotally, he added, the stalled orders could be worth as much as $500 million–and counting.

The fuse on the controversial issue was lit in 2012 when the CRA cancelled IT160R3, an “interpretive bulletin” in which it hiked how it calculates what it deems personal use of business aircraft.

Previously, corporate executives or shareholders permitted to use company aircraft for personal reasons would be taxed at a value equal to the cost of an equivalent charter or first class airline ticket. Under the new administrative policy, the CRA wants to multiply that amount and factor in the pro-rated capital cost of the aircraft.

One scenario outlined by CBAA legal counsel earlier this year set out the potential impact for the operator of a $32-million aircraft which cost $1 million annually to operate and is flown 80 hours a year for business purposes and 20 hours for personal use.

The proposed new administrative 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 the CRA’s prescribed six per cent interest on the aircraft’s original $32 million capital cost).

The CRA issued a draft administrative policy in 2016, and the CBAA said it provided significant input. What remains unclear is what guidance the CRA will provide for the years between 2012 and the time in which the new administrative policy would take effect.

These intervening years remain a significant concern for CBAA members.

The overall package presents a potentially significant tax liability for owners and operators, and the fundamental uncertainty going forward has resulted in the closure of some corporate flight departments as well as the suspended aircraft orders. Facette said one order involved five aircraft.

For now, the CBAA continues talks with CRA, most recently on Dec. 8, when Facette and the lobby’s legal counsel, Jamieson Collins of Toronto, met with CRA director general Alexandra MacLean and other officials.

Facette said MacLean, who was appointed in late October, professed to have “an open mind” about the CBAA’s position but for now, he added, “it remains to be seen.” The two sides are preparing for further talks.

“We also reinforced the message that there’s an awful lot of impending business that has not been transacted yet,” he said. “It remains to be seen if there’s a true understanding with the CRA of the economics of our industry.”

“Right now, from a business perspective, Canada is a friendly country in which to register your aircraft and we want to see that continue,” said Facette. “You can imagine the economic loss–and the job loss–of not having that going forward.”

He reiterated the CBAA membership’s dislike for uncertainty, adding: “At the end of the day, this has the potential to lead into an awful lot of litigation.” That could mean considerable costs to the government for assigning Justice Department or external counsel.

Facette said the situation begs the question, “Are they tripping over nickels to collect pennies?”

There is no indication of how much the CRA expects to collect if the current situation doesn’t change.

“If they have that analysis, they have yet to share it with us,” said Facette. “Suffice to say that this issue has garnered a great of attention,” including that of the two top senior CRA officials, Commissioner of Revenue Bob Hamilton and Deputy Commissioner Nancy Chahwan.

The ongoing debate also has drawn in the Canadian Bar Association and tax lobbies.

Although Facette joined the CBAA only a week before the meeting with the CRA officials, his 18 years as a lobbyist, including six years as president and CEO of the Canadian Airports Council, have given him insight into how government works.

He agreed the CRA’s position on corporate aircraft is a good example of the “law of unintended consequences,” in that decisions are sometimes made without much thought as to their real-world application.

“Ask anybody in any industry: they would like a ‘whole of government’ approach,” Facette told Skies. “I don’t think that’s necessarily new. This would stop the silo effect . . . . Environment, Transport, CRA, Industry should apply policy holistically. Any industry would love that.

“That said, these are tax officials and the agency narrows in on their scope . . . so we’ll see how it goes. I would hate to speculate. The CBAA board has impressed on me that this is a high-priority item and that the staff and I have to do whatever we need to do to reinforce our position.”

“We appreciate that some people at the CRA are, in their view, just doing their job,” he added. “We get that. But having said that, when they do this kind of thing, it would have been nice had the policy been developed in consultation. That said, we have to push every button that we can as a lobby organization and we will, to make sure that this comes to a resolution that the industry can live with.”

Notice a spelling mistake or typo?

Click on the button below to send an email to our team and we will get to it as soon as possible.

Report an error or typo

Have a story idea you would like to suggest?

Click on the button below to send an email to our team and we will get to it as soon as possible.

Suggest a story

Leave a comment

Your email address will not be published.