626468 New Brunswick – Tax Court of Canada finds that safe income was reduced by corporate income taxes that would be computed on that income

An individual rolled his apartment building into a Newco in consideration for a mortgage assumption and shares with nominal paid-up capital, and then rolled those shares into a new Holdco. Following the realization shortly thereafter by Newco of a taxable capital gain and recapture of depreciation on a sale of the building, Newco increased the adjusted cost base to Holdco of its shares by effecting a series of s. 84(1) dividends (including a capital dividend) – following which the individual sold his shares of Holdco to a third party for a sale price based on the amount of cash sitting in Newco.

D’Auray J followed Deuce Holdings and a statement in Kruco in finding that the safe income of Newco was reduced by the amount of corporate income tax ultimately payable by it on its gain on the building sale. She also rejected the argument of Holdco that at the time of sale, no income taxes had yet become payable (because the income for the year had not yet been determined) so that there were not yet any corporate income taxes to deduct from safe income.

Neal Armstrong. Summary of 626468 New Brunswick Inc. v. The Queen, 2018 TCC 100 under s. 55(2.1)(c).