| 24(1) | 5-902547 |
| H. Woolley | |
| (613) 952-8108 |
19(1)
October 4, 1990
Dear Sirs:
Re: Subsection 55(2) of the Income Tax Act (the "Act")
This is in reply to your letter dated September 17, 1990. In that letter you requested our comments on the effect of tenant inducement payments received by a corporation prior to May 23, 1985, on the calculation of income earned or realized ("safe income on hand") for purposes of subsection 55(2) of the Act.
The Department's views on the calculation of safe income on hand were expressed in Mr. J.R. Robertson's address to the 1981 Canadian Tax Foundation. These views were subsequently updated by Mr. M.A. Hiltz at the 1984 Corporate Management Tax Conference and Mr. R.J.L. Read at the 1988 Canadian Tax Foundation Conference.
Generally, the Department is of the view that safe income during the holding period of a share is made up of taxable income plus certain adjustments, less the sum of losses incurred, dividends paid and provincial and federal income taxes paid or payable in respect of that income. The holding period is generally the time from the later of January 1, 1972 or the acquisition of the particular share to the time immediately before the transaction or event or the commencement of the series of transactions or events referred to in paragraph 55(3)(a) of the Act.
It should be noted that the amount of safe income must be on hand when a "safe dividend" is paid. As mentioned in Mr. Robertson's paper, there could be cases where a computation of safe income results in an amount greater than that which could be paid as a safe dividend. It is necessary, therefore, to calculate not only the amount of safe income, but also to determine the amount of "safe income on hand" out of which a safe dividend may be paid. A dividend paid which exceeds this latter amount may be subject to the provisions of subsection 55(2) of the Act, as the dividend would reduce the portion of the gain on the shares which is attributable to something other than safe income.
You note that certain tenant inducement payments received by a corporation prior to May 23, 1985 may not be required to be included in computing the corporation's income for the purposes of the Act. It is the Department's view that such non-taxable receipts would not increase the corporation's safe income because the amount of such receipts would not be included in the corporations "income otherwise determined" and, hence, would not be included in the corporation's safe income as defined by subsection 55(5) of the Act. This treatment is analogous to that given to government grants that are capital in nature as described in subparagraph (xvii) on page 90 of the paper presented by Mr. Robertson at the 1981 Canadian Tax Foundation Conference.
These comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may result in a different conclusion. The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch