6 February 1989 Income Tax Severed Letter 5-7136 - Effect of Investment Tax Credits in the Calculation of "Safe Income"

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.

XXXX

B. Dwyer (613)957-2744

February 6, 1969

Dear Sirs:

Re: Effect of Investment Tax Credits in the Calculation of "Safe Income"

This is in reply to your letter dated November 25, 1988. In that letter, you requested that we set out our general position on the effect of investment tax credits in the calculation of income earned or realized ("safe income") for purposes of subsection 55(2) of the Income Tax Act (Canada) (the Act).

The Department's views on the calculation of safe income were expressed in Mr. J.R. Robertson's address to the 1981 Canadian Tax Foundation. These views were subsequently updated by Mr. M.A. Hiltz at the 1984 Corporate Management Tax Conference and Mr. R.J.L. Read at the 1988 Canadian Tax Foundation.

Generally, safe income is made up of taxable income plus certain adjustments, less the aggregate of losses incurred, dividends paid and income taxes paid or payable. The effect that various tax credits will have on the safe income of a corporation will depend on the nature of the credit involved, how it is claimed and the facts of the case. Depending on the circumstances, credits could have either a positive or negative effect on the safe income or safe income on hand calculation.

For example, assume that in Year 1 a taxpayer has claimed an investment tax credit of $350, which is included in his, income in Year 2 pursuant to paragraph 12(1)(t).

Year 1

Taxable Income                           $3,000
Tax @ 40%                     $1,200
Less ITC                         350        850
                              ------     ------
Safe income                               2,150

Year 2

Taxable Income
Before 12(1)(t)                          $4,000
Add ITC                                     350
                                         ------
Total                                    $4,350
Less Tax @ 40%                            1,740
                                         ------
After Tax Income                         $2,610
Less ITC Income Inclusion                   350
                                         ------
Safe Income                              $2,260 
                                         ------
Total safe income
at end of year 2                         $4 410

In Year 2, the taxpayer's taxable income would be increased by $350 pursuant to paragraph 12(1)(t). In the safe income calculation, this $350 "phantom" inclusion would be deducted, resulting in a net inclusion of nil.

This calculation relates to safe income and may or may not reflect safe income on hand, depending on the facts of the situation.

An investment tax credit refund is not "phantom" income. Consequently, the refund may increase safe income to the extent the refund exceeds any tax payable, in the current or following years, as a result of including the refund in income pursuant to paragraph 12(1)(t) of the Act. Due to this tax liability, the gain inherent in the shares may not reflect the full value of the refund, and consequently may not be reflected in safe income on hand.

The opinions expressed in this letter are of a purely general nature and do not take into account considerations that might arise in the context of a specific transaction. In accordance with paragraph 24 of Information Circular 70-6R, the opinions expressed herein do not constitute advance income tax rulings and consequently are not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch