Tax – Income Tax - Corporations
Safe income. RG transferred ownership of land building to corporation TH Ltd. on tax-deferred basis. RG subsequently transferred his four commons shares of TH Ltd. to taxpayer, numbered company. Taxpayer issued four common shares to RG as consideration for his transfer to it of common shares of TH Ltd.. TH Ltd. sold land and building to arm’s length purchaser for amount of $5,829,000. As result of selling land and building for this amount, TH Ltd. realized capital gain and recaptured capital cost allowance. Total capital gain that was realized on sale of property was $2,639,000, and total recaptured capital cost allowance was $1,759,684. From December 13 to December 17, 2006, TH Ltd. increased its paid-up capital by total amount of $1,879,120. Each of increases in paid-up capital resulted in deemed dividend being paid by TH Ltd. to taxpayer and corresponding increase in adjusted cost base of shares of TH Ltd. held by taxpayer. TH Ltd. elected to treat deemed dividend arising as result of increase in paid-up capital as capital dividend, which also resulted in increase in adjusted cost base of shares of TH Ltd. held by taxpayer. In order to increase adjusted cost base of shares of TH Ltd. to amount that third party purchaser would be paying to taxpayer, TH Ltd. increased its paid-up capital by additional amount of $569,093. Only issue was in relation to final deemed dividend arising as result of increase in paid-up capital of shares of TH Ltd. on December 18, 2006, in amount of $569,093. Issue was whether capital gain that was reduced was attributable to safe income. Minister reassessed taxpayer on basis that deemed dividends paid to taxpayer exceeded safe income. Taxpayer’s appeal with Tax Court of Canada was dismissed. Taxpayer appealed with Federal Court of Appeal. Appeal dismissed. Tax liability arose as result of disposition by TH Ltd. of its real property. Sale of real property by TH Ltd. that resulted in taxable capital gain and recaptured capital cost allowance occurred prior to safe-income determination time. Although taxes arising from sale of its assets were not payable as of relevant time for determining safe income TH Ltd., same income of TH Ltd., as of that time, would reflect their taxes. Income that could reasonably be considered to contribute to fair market value, and hence to capital gain that would be realized on disposition for this fair market value, would reflect taxes payable as result of earning or realizing that income. Therefore, portion of capital gain that would have been attributable to income earned or realized (safe income) prior to payment of first dividend would be equal to net amount after taxes realized by TH Ltd. on disposition of its real property. Safe income prior to payment of any deemed dividends was calculated at $1,997,598. Each paid-up capital increase that was completed during period from December 13 to December 17 resulted in crystallization of safe income as part of adjusted cost base of shares of TH Ltd. held by numbered company, and would reduce safe income on hand.
626468 New Brunswick Inc. v. Canada (2019), 2019 CarswellNat 7689, 2019 FCA 306, Wyman W. Webb J.A., D.G. Near J.A., and J.B. Laskin J.A. (F.C.A.); affirmed (2018), 2018 CarswellNat 2560, 2018 TCC 100, Johanne D'Auray J. (T.C.C. [General Procedure]).
Case Law is a weekly summary of notable civil and criminal court decisions by the Supreme Court of Canada, the Federal Court of Canada and all Ontario courts. These cases may be found online in WestlawNext Canada. To subscribe, please visit store.thomsonreuters.ca
