Are Shareholder Benefits Taxable in Canada?
Shareholder benefits are taxable under subsection 15(1) of the Income Tax Act. But what counts as a shareholder benefit? One example is when a company awards a shareholder with a benefit that isn’t a part of a legitimate transaction between the two parties. Another shareholder benefit that can occur is when someone receives a benefit in anticipation of becoming a shareholder. It is important to be aware that these benefits can be taxed – and a prime example is the case of Laliberté v. Canada 2020 FCA 97.
Laliberté’s Trip to Outer Space – What Really Happened?
This cautionary tale of benefit taxation is a colourful one. It begins with Guy Laliberté, who started out as a street performer and went on to become the founder of Cirque du Soleil. 25 years later, he became Canada’s first-ever space travel tourist, visiting the International Space Station in 2009. This bucket list adventure had been a long-standing dream of his. The trip was financed courtesy of a corporation of the Cirque du Soleil group of companies, of which Laliberté was the controlling shareholder at the time. During his stay, he was the host of a multi-channel live-stream for a clean water charity called One Drop, as well as taking photobook shots and videos for a documentary to support the charity. He was the founder of One Drop, which was also associated with Cirque du Soleil. He would later argue that the trip was a publicity stunt to raise awareness for the charity on behalf of Cirque du Soleil.
On his return, Laliberté reported $4 million of the $41,816,954 paid for the trip as a shareholder benefit. According to Laliberté, he didn’t receive any benefit, but he reported it on his personal income tax return to avoid the fallout from a tax dispute. The costs of the trip passed through several of Cirque du Soleil’s corporations as a note payable, which was written off.
The Canada Revenue Agency disagreed with Laliberté’s tax treatment of the stellar trip. Although Laliberté appealed the initial decision, the tax courts ultimately assessed that the reasons for his space travel were overwhelmingly personal. He was reassessed for $37.6 million shareholder benefit from the trip, allowing 10% for business activities based on his promotion of One Drop and Cirque du Soleil.
The Bottom Line – Why Did The Courts Assess Laliberté’s Trip as Personal?
Both The Tax Court of Canada and the Federal Court of Canada agreed that the Canada Revenue Agency’s tax assessment and allocation were correct. Lalibertés primary purpose of travel was deemed to be overwhelmingly personal. They gave 27 reasons for their decision, which can be broken down into four main arguments:
- Laliberté demonstrated multiple times his passionate interest in space travel and had previously tried to arrange personal space travel trips.
- He was responsible for organizing much of the trip, and Cirque du Soleil did not promote the trip or consider sending performers or entertainers instead of Laliberté.
- The trip was not reported as a legitimate expense by Cirque du Soleil, but as a note payable passed through the corporations.
- The business aspects of the trip appeared to be an after-thought, with little time between approval and launch of the broadcast, and denial of any Cirque du Soleil branding by NASA.
It was determined that Laliberté would have taken the trip even if the One Drop promotion had not occurred, proving the absence of a genuine business transaction. The Canadian tax lawyer argued that the Tax Court unfairly relied on Laliberté’s interest in space travel. Laliberté argued there must be an intent to impoverish the corporation that can be derived from his intent as the controlling shareholder, and reiterated his intent to promote One Drop. The Federal Court disagreed, and rejected that an intent to impoverish the corporation was required. Furthermore, they found that he accepted the trip before gaining approval from Cirque du Soleil and planned the business aspects after signing the contract with the private space travel company. Ultimately, this was used to show that the original intent for the trip was a personal benefit, regardless of any secondary business intent.
The Federal Court determined that to overturn the decision, Laliberté would have to show “that the space trip was a bona fide business venture in its entirety.” As he was not able to disprove the personal nature of the trip, the Federal Court upheld the Canada Revenue Agency’s assessment.
Shareholder Benefits – How is the Nature of a Transaction Derived?
Most taxpayers do not need to worry about whether their latest trip to outer space was taxable. However, this unusual story does highlight that even if a trip does include business activities, it could still be deemed primarily personal, and thus taxable. Tax audits and tax reassessments for shareholder benefits are not uncommon. The Canada Revenue Agency will commonly use surrounding circumstances and intent of involved parties as the basis for their decision. For example, the quick sale of a house can be used to show the intent of business use, the high value of a donation to show lack of authentic donative intent, or, in the case of Laliberté, the lack of traditional business planning of a trip to prove a shareholder benefit.
In these situations, the Canada Revenue Agency may not have access to the full story, making their judgements based solely on an outsider’s viewpoint. Our experienced Canadian tax lawyers can assist you in presenting these facts to the Canada Revenue Agency to successfully challenge their characterization of your transactions.