On the incorporation of Opco in Year 1, two unrelated Holdcos (HC and HB) each subscribed $100 for 100 Class C or Class B voting common shares. In Year 8, HA (also unrelated) subscribed $50,000 for 100 Class A voting common shares of Opco at a time that Opco's aggregate safe income was $70,000 and the FMV of its shares was $100,000 (or $150,000 after the subscription). In Year 10, at a time that the aggregate safe income of Opco was $90,000 and the FMV of its shares was $170,300, a $35,000 dividend was paid on the Class A shares of HA. How should the global safe income be allocated among the different classes given their different holding periods?
CRA indicated that if the $20,000 of safe income generated in the two years up to the dividend payment was business income (rather than, for instance, being from the realization of gains that had already accrued at the time of HA’s share subscription), and making some surmises on the contribution of this safe income to the accrued capital gain on the shares of HA, “the amount of $20,000 would represent a separate taxable dividend pursuant to paragraph 55(5)(f) and would not be subject to subsection 55(2),” whereas if the purpose test in s. 55(2.1)(b) was satisfied, the balance of the dividend could be subject to s. 55(2).
Before referring to various conferral-of-benefit provisions, GAAR and the difficulties posed by discretionary dividend shares in a butterfly, CRA stated that it was “not intended to give our general approval for the use of discretionary dividend shares.”