Travelling to space? It could cost you. In Laliberté v. Canada, the Federal Court of Appeal (FCA) confirmed the Tax Court of Canada’s (TCC) conclusion and held that 90% of the $41.8 million space trip enjoyed by the controlling shareholder of Cirque du Soleil gave rise to a shareholder benefit.
The co-founder and controlling shareholder of Cirque du Soleil, Guy Laliberté (the Appellant), took a 12 day trip to the International Space Station at a cost of $41.8 million in 2009. The cost was borne by his family holding company and then charged to the operating company (Créations Méandres Inc.) in the Cirque du Soleil group, less a $4 million shareholder benefit reported by the Appellant in his 2009 personal tax return. However, Créations Méandres did not deduct any of this amount for tax purposes, nor did any other group companies. There was a matching contribution of capital by the holding company to Créations Méandres, so the other independent shareholders did not bear any of the cost of the trip.
The Canada Revenue Agency (CRA) reassessed the Appellant and determined the entire amount should have been a taxable shareholder benefit, or an indirect benefit, conferred to the Appellant. However, the Appellant argued that his personal participation in the events was a stunt marketing event and the entire amount should therefore be deductible to the corporate group as marketing or promotional expenses, and should not be a shareholder benefit to himself. Further, the Appellant maintains that Cirque du Soleil received unpaid media from his trip which exceeded the cost of this trip and which supports the entire cost of his trip being a proper business expense.
Primer on shareholder benefits
Shareholders may benefit from their relationship with a corporation by receiving personal advantages that are otherwise not available. Subsection 15(1) of the Income Tax Act provides that if, at any time, a benefit is conferred by a corporation on a shareholder of the corporation, the amount of the value of the benefit is to be included in computing the income of the shareholder for the year. The rules in subsection 15(1) are supplemented by subsection 246(1) which provides that if a person confers a benefit on a taxpayer, directly or indirectly, the amount of the benefit is included in the taxpayer’s income. Essentially, the shareholder benefit rules apply to appropriations of corporate property by a shareholder, directly or indirectly. The term ‘benefit’ is not defined in the Act, meaning it is broad enough to capture all types of advantages flowing from a corporation to a shareholder.
The Courts’ decisions
The TCC judge determined that the “motivating, essential and overwhelming primary purpose of the travel was personal” and not a business decision. More specifically, the judge found it was always the Appellant’s personal intent to take the trip and there was no evidence anyone else would have been considered for this trip. There was no formal corporate approval or authorization of the payment, nor any formal marketing plan or budget. The Appellant would have travelled to space with or without such corporate approvals or plans. Therefore, the Appellant received a taxable shareholder benefit under subsection 15(1) and subsection 246(1) of the Act. The benefit was conferred on the Appellant directly by his family holding company when it signed the agreement and/or bore the cost of the trip and/or by allowing all or part of the benefit to be provided indirectly by another Cirque du Soleil company when it reimbursed the family holding company.
The TCC also recognized that genuine, bona fide business promotional activities were performed by the Appellant when preparing and during the space trip. However, there is still a distinction between a business trip which involves personal enjoyment aspects, and a personal trip with business aspects, and this space trip falls into the latter category. The value of the shareholder benefit equals approximately 90% of the $41.8 million cost of the trip. The remaining 10% of the cost relates to business promotion.
In dismissing the appeal, the FCA concluded that the TCC applied the correct tests by assessing whether the space trip was for business or personal purposes. There was sufficient factual basis in arriving at the conclusion that the trip was overwhelmingly personal and the Appellant received a benefit as being the shareholder.
Mixing business with pleasure
Although most shareholders are not likely to travel to space, it is not uncommon for owner-managers to derive some personal aspect or enjoyment from business pursuits. A shareholder benefit will arise if there is an economic advantage that has primarily benefited the individual. As this remains an important area of CRA’s focus, shareholders should be aware of the potential significant adverse tax consequences of mixing business with pleasure.