Principal Issues: 1- Should an adjustment be made to carve out from "safe income" any amounts included in income under subsections 34.2(2) and (12) and any amounts claimed under subsections 34.2(4) and (11)? 2- Should a negative adjustment be made in computing the "safe income on hand" if the corporate partner has an income inclusion under subsection 34.2(2) but there is a loss in the partnership for the stub period?
Position: 1- No. 2- Yes.
Reasons: 1- Based on the jurisprudence, "safe income" must be computed in accordance with the deeming provisions under paragraphs 55(5)(b), (c) and (d). More specifically, in the case of a private corporation, by virtue of paragraph 55(5)(c), the computation of "safe income" must conform to the computation of income under the Income Tax Act, disregarding two specific statutory deductions mentioned in that paragraph. Therefore, an adjustment to carve out from "safe income" any amounts included in income under subsections 34.2(2) and (12) and any amounts claimed under subsections 34.2(4) and (11) would be contrary to the wording of that provision. 2- Once the "safe income" is computed in accordance with the applicable deeming provision under subsection 55(5), the next step is to determine the "safe income on hand" which is a factual determination. Based on the jurisprudence, and consistent with the CRA's position on the treatment of non-deductible expenses, a negative adjustment should be made in respect of the loss on the basis that the amount would not be on hand to contribute to the fair market value or the gain inherent in the shares of the corporation.
