21 September 1990 Income Tax Severed Letter ACC9637 - Intercorporate Dividends - Calculation of Safe Income

902192
24(1)                                        M.P. Sarazin
                                             (613) 957-2125

19(1)

Dear Sirs:

We are writing in response to your letter dated August 16, 1990 wherein you requested a technical interpretation regarding the calculation of safe income under subsection 55(2) of the Income Tax Act (Canada) (the "Act") in the following situation.

A taxpayer corporation wishes to calculate the amount of its safe income under subsection 55(2) of the Act, in order to pay out a safe income dividend. The taxpayer corporation was in a taxable position for several years and the income taxes owing were duly paid. The taxpayer was in a loss position for its 1989 taxation year and a request was filed to carry-back the loss to the 1988 taxation year, resulting in a refund of tax to the corporation. at this time, the 1988 refund has not yet been received.

It is your view that the corporation would include the tax refund resulting from the carry-back of losses in the calculation of safe income whether or not the amounts have actually been received by the corporation. Similarly, where the corporation has income or losses in the stub period, then a notional tax payable or refundable should be accrued in the computation of safe income.

It is also your view that a credit by Revenue Canada to the corporate taxpayer's account account would constitute receipt of the refund by the corporate taxpayer.

The Department's views on the computation of safe income were expressed in Mr. J.R. Robertson's address to the 1981 Conference of the Canadian Tax Foundation. These views were subsequently updated by Mr. M.A. Hiltz at the 1984 Corporate Management Tax Conference, as well as by Mr. R.J.L. Read at the 1988 conference of the Canadian Tax Foundation. On page 84 of the Report of Proceedings of the Thirty-third Tax Conference, Mr. Robertson states: "Safe income is taxed retained earnings of the holding period on hand immediately before ... the commencement of the series of transactions or events ... On page 88 Mr. Robertson also states: "Generally, for a company other than a foreign affiliate, the Department's view of safe income during the holding period is made up of taxable income reported plus deductions for inventory allowances (paragraph 20(1)(gg)) and scientific research (section 37.1) less the sum of losses incurred, dividends paid, and income taxes (Including provincial income taxes) paid or payable in respect of the income for that same period."

We agree with your view that safe income should generally be computed on the accrual basis with the result that tax refunds for corporate returns filed prior to the time of calculation of safe income, whether or not received by the corporation, would" normally be included in the computation of safe income, whereas, the tax benefit associated with losses available for carry-forward to future years would not. Similarly, in determining the amount of safe income for a stub period the amount of estimated taxes payable on the income should be accrued. Where the corporation incurs a loss in the stub period prior to the calculation of safe income and a refund will result from the loss being carried-back to previous years then a notional tax refund should be accrued in respect of the stub period loss carry-back.

Generally, it is also our view that the corporation would consider a particular refund to have been received at the time that the corporate taxpayer's account is credited by Revenue Canada. It is also important to note that it is possible that a computation of safe income could result in an amount which is greater than that which could be paid as a "safe dividend". Subsection 55(2) of the Act discourages the payment of any dividend which would result in a significant reduction in the portion of the capital gain attributable to anything other than income earned or realized by any corporation after 1971. Therefore, it is necessary to determine the portion of the gain which reflects the income earned or realized during the holding period and the portion of the gain which is attributable to anything else, such as goodwill or unrealized appreciation in assets. If the amount of safe income computed is greater than the gain attributable to safe income, the payment of a dividend to the full extent of safe income will reduce the gain attributable to something else, and subsection 55(2) of the Act may apply to the dividend.

As stated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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