Principal Issues: Would the amount added to the taxable income pursuant to section 110.5 be added to the amount of the safe income and to the amount of the safe income on hand?
Position: No.
Reasons: The amount is not included in the net income of the corporation and it is not available for distribution.
XXXXXXXXXX 2011-041507 Sylvie Labarre, CA August 15, 2011
Dear Sir,
Subject: Calculation of safe income
This is in response to your e-mail of July 19, 2011 in which you asked us for our opinion on one aspect of the calculation of safe income.
Unless otherwise indicated, any statutory reference is to a provision of the Income Tax Act.
More specifically, you wish to know whether a corporation must add an amount, included in taxable income in accordance with section 110.5, to its safe income for the purposes of subsection 55(2).
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Section 110.5 allows a corporation to add an additional amount in computing its taxable income, to the extent that that addition results in an increase in any amount deductible by the corporation as a foreign tax credit under subsection 126(1) or (2), but does not increase certain other amounts deductible by the corporation (referred to in paragraph 110.5(b)). The amount added under section 110.5 in computing taxable income is also added in computing the corporation's non-capital loss (as defined in subsection 111(8)) for the year which can be carried forward for use in other taxation years.
The preamble to subsection 55(2) refers to a gain that would reasonably be considered to be attributable to something other than "income earned or realized by any corporation after 1971 and before the safe-income determination time... ." Paragraphs 55(5)(b) to (d) provide details of what "income earned or realized" is for the purposes of subsection 55(2). The starting point for the deeming under some of those paragraphs in deeming what is "income earned or realized” is the "income for the period otherwise determined."
We are of the view that the term "income", used as the starting point for determining a corporation's income "earned or realized," to which subsection 55(2) refers, is the net income, as computed in Division B of Part I. That position is based inter alia on the decision of the Tax Court of Canada in 454538 Ontario Limited and 454539 Ontario Limited v. M.N.R., 93 DTC 427, from which here is an excerpt:
I am satisfied that subsection 55(2) of the Act is to be read in conjunction with paragraph 55(5)(c) and section 3 of the Act. It is therefore appropriate for the Minister to consider the application of subsection 55(2) on the basis that "income earned or realized" is income determined pursuant to the provisions found in Division B of Part I of the Act.
For the purpose of computing safe income and after having made such determination of net income, the adjustments referred to in paragraphs 55(5)(b) to (d) must be taken into account.
In the current situation, section 110.5 provides for an addition to taxable income, namely the addition of an amount under Division C of Part I. Consequently, taking into account our interpretation of the word "income" as a starting point for paragraphs 55(5)(b) to (d), that amount would not be included. Paragraphs 55(5)(b) to (d) do not contain any adjustment that would add the amount of taxable income added under section 110.5 to the safe income calculation. Consequently, that amount would not be part of the safe income or "income earned or realized" under those provisions.
Furthermore, changes may be necessary to the calculation of the safe income on hand of a corporation, being what is available for distribution. In the current situation, we are of the view that there would be no adjustment to add to the safe income on hand that is available for distribution, the amount included in taxable income pursuant to section 110.5.
As previously stated, an amount equal to the amount included in the taxable income pursuant to section 110.5 is added to the non-capital loss pursuant to subsection 111(8). That latter amount would reduce neither the safe income nor the safe income on hand for the same reasons as those indicated respecting the amount included in taxable income pursuant to section 110.5.
These comments are not advance income tax rulings and are not binding on the CRA with respect to a particular situation.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch