27 September 1996 External T.I. 9630155 - SAFE INCOME - ACCOUNTING WRITE-DOWN PROVISIONS

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:

Where a corporation writes down the carrying value of a capital asset for accounting purposes, will this reduce safe income on hand?

Position:

No.

Reasons:

Since no amount of safe income has been set aside to pay an amount not currently deductible for tax purposes, this does not affect safe income.

									963015
XXXXXXXXXX							Jim Wilson

Attention: XXXXXXXXXX

September 27, 1996

Dear Sirs:

Re: Subsection 55(2) - "Safe Income on Hand"

This is in reply to your letter dated September 10, 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"). More specifically, you have described a situation where a corporation (the "Parent") purchases shares of another corporation and subsequently writes down the carrying value of such shares for accounting purposes. You wish us to confirm that the writedown would not reduce the safe income on hand of the Parent where such shares represent capital property of the Parent.

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.

However, as stated by Mr. Read in the 1988 Conference Report at page 18:6, "In a case in which a parent corporation owns a subsidiary, the safe income of the parent is calculated on a consolidated basis as required by the phrase "income earned or realized by any corporation" in the preamble of subsection 55(2). Therefore, the safe income of the subsidiary will be included in the consolidated safe income of the parent. .... For example, if a parent corporation owns all the shares of a subsidiary, the negative safe income of the subsidiary will be deducted in computing the consolidated safe income of the parent". Accordingly, should the subsidiary described in the opening paragraph incur losses, such losses would in fact reduce the Parent's consolidated safe income.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of Information Circular 70-6R2, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

Yours truly,

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