22 February 1988 Income Tax Severed Letter RCT 7-2214

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.

This is in response to your letter of September 9, 1987 wherein you requested our opinion with respect to the method used by XXX in calculating "safe income".

A. The first question asked was whether it was appropriate to consolidate the non-capital losses of non-controlled corporations with the profits of the other corporations.

The Department's position on the proper method of calculating "safe income" was explained in Mr. J. Robertson's paper presented at the 1981 Canadian Tax Foundation Conference, and was expanded by Mr. Hiltz in his presentation to the 1984 Corporate Management Tax Conference.

Mr. Robertson indicated consolidation would be permitted for subsidiary wholly-owned corporations and corporations over which the parent may exercise significant influence, and further stated that subsidiary and significant influence have the meanings given by Section 3050 of the CICA Handbook.

It should be noted that the ability to exercise significant influence is a question of fact. Guidelines are given in the CICA Handbook for which level of % shareholdings create a presumption of significant influence or below which level it is presumed that there is not significant influence but these presumptions are subject to rebuttal. Factors to be considered identified by the Handbook are representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of management personnel or provision of technical information.

Mr. Hiltz indicated in 1984 that the Department is prepared to extend the consolidation to fully-participating portfolio investments where the parent does not exercise significant influence if it can be demonstrated that the "safe income" of the other corporation contributed to the unrealized gain. However, the method used must be applied consistently to all corporations in the group and negative amounts in some corporations will offset positive amounts in others. It logically follows from this that losses incurred by companies that represent portfolio investments should also be included where it can be demonstrated that the losses contribute to the decline in value.

The published material was not intended to encompass all interpretative problems with which the Department may be faced but were intended as guidelines only. As stated on page 83 of the 1981 Conference Report the purpose of Mr. Robertson's paper was "designed to answer as many ... questions and it is our initial response to requests to publish guidelines ...". Mr. Hiltz's paper was presented "to update the position of Revenue Canada with respect to certain issues relating to Section 55 of the Income Tax Act". Neither paper was intended or represented to be a definitive statement on what constitutes safe income.

In our opinion the following principles drawn from the published papers are relevant to your situation.

• 1. "Safe income" is the amount that can be paid as a dividend without significantly reducing the portion of the potential gain accrued on the shares which is attributable to something other than post 1971 income earned or realized by any corporation.
• 2. It is logical that only the portion of the safe income that remains on hand and is reflected in the accrued gain, before the payment of dividend, can be distributed as a "safe dividend". There may be cases where a computation of safe income results in an amount greater than that which can be paid as a safe dividend.
• 3. The portion of the gain that is attributable to anything other than income earned after 1971 is attributable to unrealized, untaxed appreciation in asset values. Unrealized losses or assets will offset unrealized gains. However, where the asset being valued is shares in a company, it is the Department's view that operating losses incurred by that company that have attributed to the decline in the value of the shares are realized losses. They would therefore reduce the amount of "safe income".

It would therefore appear, based upon the facts of your case, that XXX "safe income" should be reduced by the non-capital losses of the subsidiaries.

XXX

B. The application of capital losses was specifically dealt with by the Department at the 1983 Tax Conference (page 786). Allowable capital losses will reduce the "safe income" as the losses are incurred, not as they are applied to reduce taxable income. This is a reasonable result when you consider that it is only the "safe income" on hand and reflected in the accrued gain on the shares that is available for the payment of a "safe dividend".