2021-0883161C6 STEP 2021 - Q 9 - Safe Income

Principal Issues: What non-deductible expenses will reduce the safe income that can reasonably be considered to contribute to the capital gain on a share

Position: A general description of non-deductible expenses that the CRA considers will reduce the safe income that can reasonably be considered to contribute to the capital gain on a share is provided.

Reasons: For the purposes of paragraph 55(2.1)(c) safe income is adjusted to take into account only the portion of safe income that can reasonably be considered to contribute to the capital gain on a share.

Author: Witteveen, Tobias
Section: 55(1), (2.1) and (5)

2021 STEP CRA Roundtable – June 15, 2021

QUESTION 9. Safe Income Computation

CRA’s Income Tax Technical News No. 37 released in 2008 sets out the CRA’s position that non-deductible expenses must be deducted in computing safe income on hand. However, non-deductible expenses for purposes of the safe income on hand calculation are not explicitly defined. In addition, the phrase ‘non-deductible expenses’ is not defined within subsection 55(5) of the Income Tax Act (the “Act”). Accordingly, can the CRA provide a definition of non-deductible expenses for the purposes of section 55?

CRA Response

In this response “safe income” will be used to describe the income earned or realized after 1971 and before the applicable safe income determination time (as determined under paragraphs 55(5)(b) and (c) of the Act) and “safe income on hand” will be used to describe safe income that can reasonably be considered to contribute to the capital gain on a share.

In John R. Robertson’s paper “Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55”, Report of Proceedings of the Thirty-Third Tax Conference, 1981 Conference Report (Toronto: Canadian Tax Foundation, 1982) (the “Robertson Rules”) non-deductible expenses were generally described as any expense incurred or disbursement made that was not allowed or not claimed as a deduction in computing income (other than an expense or disbursement made in respect of the acquisition of property or a repayment on account of the principal amount of a loan). In Income Tax Technical News No. 37 non-deductible expenses are generally described as cash outflows which are not deducted in the computation of a corporation’s net income for tax purposes but still have the effect of reducing the amount of disposable after-tax income by an equivalent amount.

The positions set out in the Robertson Rules and Income Tax Technical News No. 37 continue to reflect the CRA’s administrative position regarding the non-deductible expenses that will reduce safe income in order to determine safe income on hand. Specifically, non-deductible expenses can generally be described as cash outflows which are not deducted in the computation of a corporation’s net income for tax purposes (other than an expense or disbursement made in respect of the acquisition of property or a repayment on account of the principal amount of a loan) and safe income should be reduced by such non-deductible expenses in order to determine the safe income on hand.

Examples of non-deductible expenses would include:

*    dividends paid or payable;
*    taxes (including refundable taxes);
*    non-deductible interest and penalties;
*    charitable donations, gifts and political donations that are not already deducted in net income for tax purposes; and
*    non-deductible (portion of) expenses or expenditures, such as the non-deductible potion of meal and entertainment expenses.

It should also be noted that in addition to the non-deductible expenses described above, as confirmed in CRA Document 2016-0672321C6, contingent liabilities and accounting reserves also need to be taken into account in determining safe income on hand.

Tobias Witteveen
2021-088316

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