The safe income on hand of Holdco, which redeemed shares of Holdco held in a year by “Portco”, was based on the safe income on hand of Opco, which had a non-capital loss (NCL) in that year because it excluded work-in-progress (WIP) from its income for purposes of the Act in that year as that income would not be realized for purposes of the Act until it was billed. The taxpayer’s computation of the safe income on hand of Opco did not deduct the NCL, and instead treated it as a deduction from safe income on hand in the subsequent years to which the NCL was carried forward. In rejecting this approach, the Directorate stated:
[T]he tax loss sustained by Opco in XXXXXXXXXX is not fictitious. That loss instead results from the application of the Act and reflects expenses actually incurred by Opco. Indeed, the fact that an item of revenue recognized at the accounting level can be deducted when calculating the net taxable income of a corporation operating in the construction sector does not detract from the fact that the expenses that create that tax loss have actually been incurred by the corporation. The peculiarity here instead lies in the fact that part of the income invoiced by the corporation will be included in the computation of the net income of the corporation at a later date and cannot therefore be part of the "realized or earned" income of the corporation until that later time. …
The CRA's longstanding position is instead to reduce the safe income on hand by every dollar of expenses that contributed to the loss sustained by the corporation on the grounds that such income is no longer on hand to contribute to the unrealized capital gain on a share.