21 July 1997 External T.I. 9719325 - SAFE INCOME - INVESTMENT TAX CREDITS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether ITC can be included in safe income in year it is claimed

Position: No

Reasons:

safe income only includes amounts which have been included in income for tax purposes

971932
XXXXXXXXXX Ted Harris

Attention: XXXXXXXXXX

July 17, 1997

Dear Sirs:

Re: Safe Income - Effect of Investment Tax Credits

We are writing in response to your letter of July 15, 1997 wherein you requested a technical interpretation concerning the impact of investment tax credits ("ITC") on the calculation of a corporation's safe income on hand.

You have referred to the paper titled Income Earned or Realized: Some Reflections which was presented by Michael Hiltz at the 1991 annual conference of the Canadian Tax Foundation, which indicates that the amount of income taxes payable which reduce a corporation's safe income on hand is the amount of such taxes payable for the year without taking into account any ITC which might be used to reduce the amount of such taxes. The ITC will only be brought into safe income in a subsequent year as the amount of the ITC is reflected in the corporation's net income pursuant to a specific provision of the Income Tax Act, such as one of paragraphs 12(1)(t), 13(7.1)(e), 37(1)(e) or "L" in the definition of cumulative Canadian exploration expense in subsection 66.1(6).

You have asked us to consider the situation where an ITC is earned in Year 1 and is deducted in computing the amount of the corporation's taxes payable in that year. The full amount of the ITC is then included in the corporation's income in Year 2. In such circumstances you suggest that it would be appropriate to include the amount of the ITC in computing the corporation's safe income for Year 1 since the only reason the ITC's are included in income of Year 2 is to avoid the circularity problem.

Our Comments

As stated in our response to question 12 of the 1993 Revenue Canada Round Table, safe income with respect to a share of a corporation refers to the corporation's net income, as determined for purposes of the Act, as adjusted by paragraphs 55(5)(b), (c) or (d), as the case may be, that is attributable to that particular share during the relevant holding period. Since the starting point for determining safe income and "safe income on hand" is the corporation's net income for tax purposes, an amount can not be included in the corporation's safe income or safe income on hand until it is included in its net income as determined under section 3 of the Act for a given taxation year. In our view, this approach is consistent with the tax policy that safe income is protected from the application of subsection 55(2) because the income has been subject to corporate income tax and should therefore be allowed to be paid as a tax-free dividend to other Canadian corporations. Since, in the situation you describe the ITC has not been included in the corporation's income which has been subject to income tax, we do not believe that it would be appropriate to include such amount in the calculation of the corporation's safe income or safe income on hand.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch