Can Holdco wholly-owns Can Opco, which wholly-owns US FA (its only asset). These shareholdings have a nominal ACB. The time (“Time 1”) immediately before the safe-income determination time occurs before the time (“Time 2”) that is immediately before the payment of a dividend by Can Opco to Can Holdco. From Time 1 through to Time 2, US FA has US$100 of cash and no other assets, and its “tax-free surplus balance” is US$100.
For safe income computation purposes, should the exchange rate at the time of the dividend payment be used rather than at the safe-income determination time?
For example, in Scenario 1, the FX rate is US $1 = CDN $1 at Time 1 and US $1 = CDN $1.2 at Time 2, and at Time 2, Can Opco pays a dividend of $120 to Can Holdco.
And in Scenario 2, the exchange rates are US $1 = CDN $1.2 at Time 1 and US $1 = CDN $1 at Times 1 and 2, respectively - and at Time 2 Can Opco pays a $100 dividend to Can Holdco.
CRA indicated that in Scenario 1, under the scheme of s. 55(5)(d), the exchange rate to be used should be the rate at Time 1, making the amount under s. 55(5)(d)(i) equal to $100. The fair market value of the shares of US FA would not exceed $100 at Time 1. Therefore, the amount of income of US FA to be added to the income earned or realized by Can Opco at Time 1 is $100. The dividend of $120 would therefore exceed the amount determined to be income earned or realized by Can Opco.
Scenario 2 follows the same approach. The amount determined under s. 55(5)(d)(i) would be $120. The gain that could be realized on the disposition of the shares of Can Opco immediately before the dividend is only $100. The income earned or realized by Can Opco that can reasonably be considered to contribute to the accrued gain on the shares of Can Opco would be limited to $100.