20 October 1992 Income Tax Severed Letter 9102485 - 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.

5-910248
D.A. Palamar
24(1) (613) 957-2092

Attention: 19(1)

October 20, 1992

Dear Sirs:

Re: Request for Technical Interpretation Subsection 55(2) of the Income Tax Act (the "Act")

We are writing in response to your letter, dated January 14, 1991. We apologize for the delay in our response.

You have requested our views on the treatment of an assignment of tax payable under Part VI.1 (all statutory references in this letter are to the Act) to a related corporation, and the accompanying deduction from taxable income under paragraph 110(1)(k), on the calculation of income earned or realized by any corporation for purposes of subsection 55(2) ("safe income") in the following situation:

• • The parent company ("Parent Co.") has no taxable income in the taxation year and pays a $500 dividend out of retained earnings which is subject to Part VI.1 tax.

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• • The Part VI.1 tax relating to the $500 dividend is $200.
• • A subsidiary of Parent Co. ("Subco") has income for tax purposes of $1,000.
• • Parent Co. assigns its Part VI.1 liability and corresponding paragraph 110(1)(k) deduction to Subco, using the provisions of subsection 191.3(1). It is your view that the deduction under paragraph 110(1)(k) is a non-cash adjustment to taxable income that should be treated similar to other non-cash adjustments such as the former inventory allowance and the non- taxable portion of capital gains referred to in subsection 55(5). You wish us to confirm that the deduction from income for tax purposes in Subco under paragraph 110(1)(k) will not reduce the computation of safe income in either Subco or Parent Co.

Our Comments

In our view, the deduction under paragraph 110(1)(k) will not reduce the safe income of Subco because it does not reduce Subco's income, within the meaning of subsection 55(5), but rather is a deduction from taxable income.

The deduction will also have no effect on the safe income of Parent Co.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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