CRA indicates that contingent liabilities that reduce shares’ FMV should also reduce safe income on hand

We have published summaries of the questions posed at the 7 October 2022 APFF Roundtable together with our translations of the full text of the Income Tax Ruling Directorate’s provisional written answers.

Q.1 dealt with an example where the FMV of Holdco’s shares of Opco (having a nil ACB) is $1,000,000, consisting of shareholder’s equity (i.e., share capital and retained earnings, also equaling safe income earnings) of $800,000, unrealized gains of $500,000 and contingent liabilities and accounting provisions valued at $300,000. It was suggested to CRA that in determining safe income on hand, the accounting contingencies and reserves should be considered to reduce first the unrealized gains rather than the safe income on hand.

CRA maintained its “longstanding position that to the extent that contingencies and accounting reserves have the effect of reducing the inherent gain on a corporation's share, such amounts should reduce the corporation's safe income on hand” – but indicated that it would “be prepared to consider more specific situations in the context of a request for advance rulings… .”

Neal Armstrong. Summary of 7 October 2022 APFF Federal Roundtable, Q.1 under s. 55(2.1)(c).