In 2015, Opco, which had safe income of nil, paid a dividend on its 100 common shares to its sole shareholder (Mr. X) equaling the fair market value ("FMV") of Opco, being the $100,000 value of an intangible asset. The dividend was funded with a $100,000 loan.
A Holdco ("Holdco Y") for an arm’s length individual (Mr. Y) then subscribed $100 for 100 common shares of Opco.
In 2018, Mr. X transferred his 100 common shares to a newly-formed wholly-owned corporation ("Holdco X") on a rollover basis at the shares’ ACB of $100.
Subsequent to the payment of the dividend in 2015, the aggregate safe income generated by Opco was $200,000. At the end of its 2018 taxation year, Opco had $100,000 in cash and the value of the intangible was still $100,000. The $100,000 loan was repaid out of the $200,000 of income earned. The FMV of all the shares in the capital stock of Opco at the end of 2018 was $200,000.
(a) If a dividend of $200,000 were paid on the Opco common shares, what would be the safe income of the 100 Opco common shares held by Holdco X?
(b) Would the answer be the same if instead of there being a dividend in 2015, Opco repurchased Mr. X's shares and issued 100 new common shares of its capital stock to Mr. X and Holdco Y, respectively?
Q.(a)
CRA indicated that at the time of the s. 85(1) transfer by Mr. X of his 100 Opco shares to Holdco X, their safe income was retained and that, since the loan was “was repaid out of the corporation's earned or realized income … that income cannot be viewed as contributing to the unrealized gain on the common shares of the capital stock of Opco” – so that the relevant safe income of the 100 Opco common shares of Holdco X (and also of Holdco Y) was $50,000.
Q.(b)
Assuming that Opco received a loan to redeem its shares held by Mr. X in 2015 so as to generate a deemed taxable dividend to him and that such loan also was repaid at the end of 2018, the answer would be the same.