A Canadian Tax Lawyer’s Perspective On An Out Of This World Shareholder Benefit Decision Lalibert v. Canada – Tax – Canada – Mondaq News Alerts

23 July 2020

Rotfleisch & Samulovitch P.C.

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Subsection 15(1) of the Income Tax Act renders shareholderbenefits taxable. A shareholder benefit arises where a shareholderreceives a benefit from a corporation that is not part of a bonafide transaction between the corporation and the shareholder. Ashareholder benefit may also arise where the benefit is received bya person in contemplation of that person becoming a shareholder.The taxation of shareholder's benefits starred in the recentcase of Lalibert v. Canada 2020 FCA 97.

Guy Lalibert is the founder of Cirque du Soleil. In2009, he completed his long term dream of visiting theInternational Space Station. The twelve-day once-in-a-lifetime tripwas organized by a private space travel firm and paid for by acorporation in the Cirque du Soleil corporate group, of whichLalibert was the controlling shareholder. While at theInternational Space Station, Lalibert hosted a multi-hourcharity livestream in support of One Drop, a clean water charityfounded by Lalibert and associated with Cirque du Soleil.He took pictures for a photobook and film for a documentary, bothintended to support One Drop.

When Lalibert returned from the International SpaceStation, he reported $4 million of the $41,816,954 paid for thetrip as a shareholder benefit. He claimed he received noshareholder benefit, but reported the amount on his personal incometax return regardless to avoid a tax dispute and bad publicity. Thecosts of the trip were moved through several of Cirque duSoleil's corporations as a promissory note which was writtenoff.

The Canada Revenue Agency disagreed with Lalibert'stax treatment of the stellar trip. The position of the CanadaRevenue Agency was that the trip was primarily a personal trip forLalibert. Any business aspects of the trip were added byLalibert after planning the trip to make the trip appear asa business trip. They reassessed Lalibert for about $37.6million dollar shareholder benefit from the trip. The remaining 10%of the trip price was allowed as a tax deduction as a businessexpense to reflect Lalibert's promotion of One Drop andCirque Du Soleil during the trip.

The Tax Court of Canada and the Federal Court ofCanada both concluded the Canada Revenue Agency's taxassessment and allocation were correct. The Courts found based on27 factors that the "overwhelmingly primary purpose of thetravel was personal". These factors can be summarized in fourcategories:

With the overwhelming evidence the trip was primarily personallymotivated, and would have likely proceeded even if Lalibertcould not have promoted Cirque du Soleil, there was no bona fidebusiness transaction between the corporation and Lalibert.The Canadian tax lawyer for Lalibert attempted to arguethat the Tax Court relied too heavily on considering his intent.Alternately, Lalibert argued there must be an intent toimpoverish the corporation which can be derived from his intent asthe controlling shareholder. He reiterated his intent with the tripwas support of One Drop and Cirque du Soleil. The Federal Courtdisagreed. Many of the above listed factors were unrelated toLalibert's personal interest in space travel. Hispersonal interest was not, by itself, determinative. Further, thecourt rejected an intent to impoverish the corporation wasrequired, or that such an intent could be found in this case. Thecourt found it evident that Lalibert only planned thebusiness aspects of the trip after the contract with the privatespace travel company was signed. This means even if you derivecorporate intent from the controlling shareholder's intent inthese circumstances, that original intent would be the personalbenefit of Lalibert.

The Federal Court found if Lalibert wanted theshareholder benefit assessment overturned, he had to demonstrate ona balance of probabilities that the "that the space trip was abona fide business venture in its entirety." He was not ableto refute the evidence of the personal nature of the space trip.The Federal Court thus upheld the Canada Revenue Agency'sassessment.

Most taxpayer will not encounter the circus of circumstances inLalibert v. Canada, but tax audits and tax reassessments focusing onshareholder benefits are common. It is also common for the CanadaRevenue Agency to attempt to derive the nature of a transactionfrom surrounding circumstances and the intents of the partiesinvolved. The Canada Revenue Agency may see a quick sale of a houseto show intent of business not personal use, the high value of adonation to demonstrate a lack of "donative intent", orfew signs of traditional business planning in a space trip to showa shareholder benefit. Issues frequently arise with the CanadaRevenue Agency's analysis because they are observing thetransaction as an outside party without the full facts the taxpayermay have access to. Our experienced Canadian tax lawyers can assist you inpresenting these facts to the Canada Revenue Agency to successfullychallenge their characterization of your transactions.

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