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.
Principal Issues: Is the amount in excess of the prescribed cost limit of a Class 10.1 vehicle to be deducted in the calculation of safe income?
Position: No.
Reasons: (1) Under the approach of the FCA in the Kruco case, there is no special treatment required. (2) Under the CRA's historical approach, no deduction is required for the cost of an asset acquired by the corporation.
XXXXXXXXXX 2006-016855
Marc Edelson, LL.B.
Attention: XXXXXXXXXX
August 23, 2006
Dear Sir:
Re: Safe Income on Hand
This is in reply to your electronic mail correspondence to us of January 24, 2006 wherein you requested our views concerning the treatment of certain vehicle costs in the calculation of safe income on hand. Unless otherwise stated, all statutory references herein are to the Income Tax Act (Canada) and all references to regulations are to the regulations to that statute.
You have asked that we consider the situation where a corporation purchases a vehicle that is included in Class 10.1 of Schedule II to the regulations so that, pursuant to paragraph 13(7)(g), the portion of the cost of the vehicle that is in excess of the prescribed limit (herein called the "excess amount") is not included in the capital cost of the vehicle. In that situation, you have inquired whether the excess amount is deducted in the calculation of the corporation's safe income on hand.
Your request appears to relate to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments. In Income Tax Technical News #33, dated September 16, 2005 (see also Income Tax Technical News #34, dated April 28, 2006), the Canada Revenue Agency (herein, the "CRA") announced that it would follow the approach mandated by the Federal Court of Appeal in The Queen v. Kruco Inc., 2003 DTC 5506, which was described as follows:
"... an amount will generally only be included in a corporation's safe income to the extent that it has been included in the determination of its net income for tax purposes or is an adjustment specifically set out in paragraph 55(5)(b) or (c). Similarly, an amount that has been deducted in computing a corporation's net income for tax purposes will reduce the corporation's safe income. Otherwise, safe income will generally only be reduced by those cash outflows that occur after the determination of net income, but before the dividend is paid (such as taxes and dividends) to the extent that such disbursements reduce the income to which the capital gain may be attributable."
Under that approach, it is our view that there is no requirement that the excess amount be deducted in the calculation of the corporation's safe income on hand.
As a transitional measure the CRA also announced that, for taxable dividends received prior to January 1, 2007, a dividend recipient could choose either:
(a) to determine the safe income on hand in accordance with the CRA's historical positions; or
(b) to determine the safe income in accordance with the approach mandated by the Federal Court of Appeal in the Kruco case.
However, if the dividend recipient chose to follow the CRA's historical position, it was required to accept the CRA's guidelines as a package.
Historically, the CRA's position with respect to non-deductible expenses was set out in a paper titled "Capital Gains Strips: A Revenue Canada Perspective On the Provisions of Section 55" which was presented by J.R. Robertson at the 1981 annual conference of the Canadian Tax Foundation where it was stated that:
"xviii) A deduction for any expense incurred or disbursement made in the period that was not allowed or not claimed as a deduction in computing income will reduce safe income. However, there will be no deduction for an expense incurred or disbursement made in respect of the acquisition of property, an eligible capital expenditure, or a repayment on account of the principal amount of a loan." [Emphasis added.] Consequently, under the CRA's historical approach a corporation's safe income on hand would not be reduced by the excess amount in respect of the purchase of a vehicle as this amount represents funds that have been used to acquire property that is an asset of the corporation. However, following the disposition of the vehicle an adjustment to safe income on hand would be necessary to reflect the non-deductible portion of any loss realized on the disposition.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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