17 May 1994 CTF Roundtable Q. 17, 9409540 - SAFE INCOME AND ALBERTA ROYALTY TAX CREDITS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

-Effects of Alberta Royalty Tax Credits on Safe Income

Position TAKEN:

	- Alberta Royalty Tax Credits treated as a government 	grant and effects as stated in Robertson's 1981 Paper

Reasons FOR POSITION TAKEN:

	- 1992 Correspondence on file (file 913262) supports 	this position

DRAFT

Calgary District Office Round Table

Question #17

ALBERTA ROYALTY TAX CREDITS AND SAFE INCOME

Should Alberta Royalty Tax Credits be included in the computation of a corporation's "safe income" for the purposes of subsection 55(2) of the Act?

Department's Position

The expression "income earned or realized" by a corporation (i.e. "safe income") is deemed to be the amount determined pursuant to paragraph 55(5)(b), (c) or (d) of the Act, as the case may be. Consequently, "safe income" with respect to a share of a corporation refers to the corporation's net income, as determined for purposes of the Act, as adjusted by paragraphs 55(5)(b), (c) or (d), as the case may be, that is attributable to that particular share during the relevant holding period. However, in order to contribute to a gain on a share, income earned or realized must be on hand. Consequently, "safe income on hand" with respect to a share of a corporation at a particular time refers to the portion of the income earned or realized by the corporation during the relevant holding period that could reasonably be considered to contribute to the capital gain that would be realized on a disposition at fair market value of the share at that time. It follows then that income that has been distributed as a dividend or laid out to pay taxes or non-deductible expenses is not on hand and cannot contribute to the fair market value of, or the gain inherent in, a share.

We are of the view that an Alberta Royalty Tax Credit is equivalent to a government grant. It is the Department's current position that an Alberta Royalty Tax Credit is not included in a taxpayer's income under paragraph 12(1)(x) of the Act and it does not reduce any of the taxpayer's resource pools. Since an Alberta Royalty Tax Credit is not included in a corporation's net income for tax purposes, it would not be included in determining the corporation's safe income or safe income on hand. This treatment is consistent with the Department's views on the effects that various forms of government assistance would have on the computation of a corporation's safe income as explained on pages 15:15 to 15:24 of the paper "Income Earned or Realized: Some Reflections" that was published in the 1991 Conference Report of the Canadian Tax Foundation.

Author: M. Sarazin
File:940954
Date:May 3, 1994