The taxpayer, which held approximately 32.5% of the common shares of another corporation ("Kruger"), took the position that it received a deemed dividend out of safe income of Kruger when Kruger repurchased the common shares held by the taxpayer. The Minister took the position that safe income on hand was reduced by investment tax credits claimed by Kruger (which resulted in a decrease in the undepreciated capital cost of depreciable properties of Kruger and, therefore, resulted in an increase in the taxable income of Kruger without any corresponding generation of cashflow); and by income inclusions to Kruger under s. 12(1)(t), which also represented taxable income for which there was no corresponding cash inflow.
In rejecting this position of the Minister, Noël J.A. noted (at p. 5512) that paragraph 55(5)(c) only made adjustments with respect to two specific items (ss.20(1)(gg) and 37.1) that represented deductions that were not associated with actual cash outflows and indicated that "what this shows is that Parliament had in mind the issue which the appellant now seeks to address and nevertheless opted to deem a corporation's 'income earned or realized' to be income computed under the Act subject only to the two stated exceptions." Accordingly, no adjustment should be made for other items in computing income earned or realized.