6 May 1996 External T.I. 9611245 - SAFE INCOME-PROVISION FOR CAPITAL ITEM, DIVIDENDS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

computation of safe income (1) does an accounting provision for an accrued loss on a capital loan reduce safe income? (2) can safe income earned after the commencement of the series be applied to ordinary course dividends paid after the commencement of the series?

Position:

(1) no (2) yes.

Reasons:

(1) Capital item does not represent safe income that has been set aside to pay a future obligation. (2) Position in accordance with policy of Department of Finance.

	  	                 961124
XXXXXXXXXX	                     V. Plant
(613) 957-2120

Attention: XXXXXXXXXX

May 6,1996

Dear Sirs:

Re: Calculation of income earned or realized ("safe income")

This is in reply to your letter of March 20, 1996 in which you requested our opinion regarding the computation of safe income on hand for the purposes of subsection 55(2) of the Income Tax Act (the "Act").

You would like to know whether an accounting provision on capital loans which is not deductible for tax purposes would reduce the safe income on hand. You indicate that the view that safe income on hand would not be reduced by such a provision would be consistent with the view expressed by Mr. Michael Hiltz on page 15:3 of the Report of Proceedings of the Forty-Third Tax Conference (1991) of the Canadian Tax Foundation. You have also asked for our views concerning the effect of regular annual dividends which are paid after the commencement of the series of transactions on the computation of safe income on hand.

Our comments

To the extent that a writedown in the carrying value of a capital asset reflects an accrued loss inherent in the property, we would agree that such a writedown would not reduce safe income on hand, since it does not represent an amount of safe income that has been set aside to pay an amount not currently deductible for tax purposes. As stated by Mr. Hiltz in the 1991 Conference Report at page 15:3, the portion of the gain inherent in the shares of a corporation that is attributable to something other than income earned or realized is reduced by the loss that is attributable to something other than income earned or realized. However, it remains our view as described in our response to Question 12 of the Revenue Canada Round Table at the 1993 Conference of the Canadian Tax Foundation that certain accounting provisions which are directly related to the income earning process, such as a provision for warranties or pensions, would reduce the safe income on hand.

The computation of safe income on hand in respect of shares held by a shareholder does not include any income realized by the corporation after the beginning of the series of transactions which results in one of the situations described in subparagraphs 55(3)(a)(i) or (ii) of the Act. If regular annual dividends are paid after the beginning of the series of transactions and before the transaction or event described in the above subparagraphs, it is our view that they will reduce the safe income on hand with respect to the shares only to the extent that they exceed the notional safe income on hand attributable to the shares which is realized after the beginning of the series of transactions and before the transaction or event described in subparagraphs 55(3)(a)(i) and (ii) of the Act.

The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, issued by Revenue Canada, Customs, Excise and Taxation.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch