Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
Does the amount of an investment tax credit claimed pursuant to subsection 127(5) of the Act in computing tax payable reduce a corporation's safe income on hand?
Position:
No.
Reasons:
Statement made by Mr. M. Hiltz at the 1991 conference of the Canadian Tax Foundation.
XXXXXXXXXX 2000-004714
Fouad Daaboul
June 4, 2001
Dear Madam,
Subject: Refund of an investment tax credit when computing safe income on hand
This is in reply to your letter of September 11, 2000 in which you requested our opinion on the above subject in relation to the situation described below. We apologize for the delay in responding to your request. The situation as you have described it is as follows.
SITUATION
It is generally understood that a corporation's income earned or realized after 1971 ("safe income") will be increased when the investment tax credit is deducted from tax payable under subsection 127(5) of the Income Tax Act (the "Act"). Consequently, when the investment tax credit again creates safe income through the reduction in capital cost allowance, safe income must be reduced by the amount of phantom income thus created. In this way, the amounts received by the corporation are included in safe income on the date the investment tax credit is deducted from the tax payable.
On the other hand, for the refundable investment tax credit, it seems that the suggested method recommends disregarding the amount thus refunded, on the basis that the safe income will be updated automatically through the reduction of the subsequent capital cost allowance. We believe that the treatment accorded to the investment tax credit deducted from tax and the treatment accorded to the refundable investment tax credit do not lead to the same result in the computation of safe income. This is particularly true where a transaction is carried out in the year following the receipt of the investment tax credit.
It is understood that, at that precise date, the notional income resulting from the reduction in depreciation will not be computed in the first situation, whereas in the second situation no safe income will be attributed to the receipt of the refundable investment tax credit.
Here is an example of how this difference is computed for a transaction on January 1, 2000:
Situation 1
December 31, 1998 December 31, 1999
Federal taxable income $100,000 ----
Less: Federal and provincial taxes
Federal and provincial taxes $23,000
Tax credit applied (carryover from 1999) ($10,000)
$13,000
Phantom income (from 2000) ----
$13,000 ----
Total safe income $87,000 ----
Situation 2
December 31, 1998 December 31, 1999
Federal taxable income $100,000 ----
Refundable tax credit $10,000
Less:
Federal and provincial taxes $23,000
Phantom income ----
$23,000 ----
Total safe income $77,000 ----
QUESTION
You are asking for confirmation of your understanding of the computation of safe income on hand in the situation described above.
OUR COMMENTS
As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, it is the practice of the Canada Customs and Revenue Agency (CCRA) not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to whether a completed transaction has received appropriate tax treatment, that determination rests first with our Tax Services Offices following their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, fully apply to the situation you have presented to us.
The impact of the investment tax credit on the computation of safe income on hand was discussed by a CCRA representative, Mr. M. Hiltz, in a speech given at the 1991 conference of the Canadian Tax Foundation.
Contrary to your assertion, for purposes of determining safe income in respect of a share, as indicated by Mr. Hiltz on page 15:16 of the 1991 Conference Report, where a corporation has acquired depreciable property in a particular year, its safe income for the year is not affected by the fact that an amount is deducted in computing the tax payable, for the year in respect of the property, pursuant to subsection 127(5). The amount of investment tax credit deducted is not included in income or safe income. However, the capital cost of the property is reduced, in the year following the particular year, by the amount of the investment tax credit thus deducted, pursuant to paragraph 13(7.1)(e). In this regard, we refer you to Example 8, on page 15:20 of the above document, which illustrates the computation of safe income on hand in a situation where an investment tax credit is claimed in the year of acquisition of a depreciable property.
With respect to a refundable investment tax credit, as mentioned by Mr. Hiltz on page 15:24 of the above document, the application of section 127.1 has consequences similar to those of the deduction of a tax credit provided for in subsection 127(5).
These comments are not advance income tax rulings and do not bind the CCRA with respect to any particular situation.
We hope you find these comments of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and
Resource Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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