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: CRA's views on consolidation of safe income.
Position: The views adopted in 1984 remain the same. Furthermore, Brelco is followed regarding the consolidation of negative safe income.
Reasons: See below.
2020 CTF Annual Conference
Question 2: Consolidation of safe income in a corporate group
Could the CRA reiterate its views on the consolidation of safe income in a corporate group?
Because of the wording “income earned or realized by any corporation,” it has been the CRA’s long-held view that a corporation can consolidate safe income of other corporations in which it has significant influence. The reason for the condition of “significant influence” was simple and practical: how could one expect to be able to access the financial and other information and to calculate safe income of corporations in which one does not have significant influence?
In 1984, the CRA expanded its position as follows:
In 1981, Revenue Canada (subsequently referred to as "the Department") indicated that the word "any" in the phrase "income earned or realized by any corporation" permits the consolidation of safe income within a corporate group. In cases where a corporation does not exercise significant influence over another corporation in which it owns fully participating shares, the safe income of the corporation should include only dividends received from the other corporation to the extent that they were paid out of safe income of the payer corporation. After facing this issue in many factual situations, the Department is prepared to make an exception in cases where a corporation does not exercise significant influence, if it can be clearly demonstrated that the income of the other corporation contributed to the unrealized gain on the shares. [emphasis added]. (footnote 1)
The position adopted in 1984 is still valid and very relevant today. One can consolidate safe income of a corporation over which there is no significant influence if it can be clearly demonstrated that the safe income of such corporation contributes to the gain on the shares, bearing in mind that, in the case of portfolio investments in public corporations, what would be considered to contribute to the value of the shares held by the shareholder is not the income of the public corporations but rather the trading value of its shares on the stock exchange.
The above discussion would also apply to consolidation of income from foreign corporations that are not foreign affiliates of the shareholder, as confirmed in Lamont. (footnote 2)
With respect to negative safe income, the CRA is of the view that the negative safe income of corporations would reduce the safe income of a holding corporation only to the extent that it can be considered to result in a reduction of the value of the shares of the holding corporation, for example, either because of a guarantee made by the holding corporation, or because of an actual payment for the losses by the holding corporation. This position is in line with Brelco. (footnote 3)
October 27, 2020
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Michael A. Hiltz, "Section 55: An Update," in Selected Income Tax Aspects of the Purchase and Sale of a Business, 1984 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1984), 40-46.
2 Lamont Management Ltd. v. the Queen 2000 D.T.C. 6256 (FCA).
3 Brelco Drilling Ltd. v. the Queen 99 D.T.C. 5253 (FCA).
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