https://decisia.lexum.com/tcc-cci/decisions/en/item/310628/index.do
626468 New Brunswick Inc. v. The Queen (March 25, 2018 – 2018 TCC 100, D’Auray J.).
Précis: The corporate taxpayer claimed that when its subsidiary sold a piece of real estate, the full taxable capital gain and recaptured CCA totaling $3,079,184 entered into its “safe income” computation for the purposes of subsection 55(2) of the Act. That safe income was calculated when it increased its paid-up capital giving rise to a deemed dividend to the corporate taxpayer (December 13, 2006). CRA reassessed on the basis that the safe income was only $1,998,098 since it was reduced by the subsidiary’s tax liability of $1,081,586 on the sale of the real estate (computed as at December 13, 2006). The taxpayer argued that the tax should be computed at the end of the 2006 taxation year, i.e., December 31, 2006, and that it had no tax to pay on that date since it had acquired software giving rise to sufficient CCA to shelter the income in question. (The software deduction was under objection at the time of this trial.) The Tax Court agreed with CRA and dismissed the appeal with costs.
Decision: Justice D’Auray first cited the decision of Nöel J.A. (as he then was) in The Queen v. Kruco Inc. holding that safe income had to be determined net of applicable taxes. She then went on to conclude that the determination must be made at the time the dividends in questions (or, as in this case, deemed dividends) were paid:
[30] The appellant argues that taxes have to be calculated at the end of the year and that at the end of the year Tri-Holdings did not owe any income tax. Therefore, the safe income should not have been reduced by the Minister as no taxes were payable by Tri-Holdings.
[31] I do not agree with the appellant. As stated by Justice Sharlow in VIH Logging Ltd., supra, the phrase “income for the year” is not used in subsection 55(2) of the Act.
[32] Safe income has to be determined as prescribed by the Act. The safe-income determination time is set out in the Act as follows:
safe-income determination time for a transaction or event or a series of transactions or events means the time that is the earlier of
(a) the time that is immediately after the earliest disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to 55(3)(a)(v) that resulted from the transaction, event or series, and
(b) the time that is immediately before the earliest time that a dividend is paid as part of the transaction, event or series;
[33] In this appeal, the safe income of Tri-Holdings had to be determined immediately before December 13, 2006, namely before the first deemed dividend was generated. This is what the Minister did, and in so doing, the Minister properly calculated the safe income by taking into account the income tax liability of Tri-Holdings.
As a result Justice D’Auray dismissed the appeal with costs.