2020 Ruling 2020-0854091R3 - Safe Income and Section 47 -- summary under Paragraph 55(2.1)(c)

Background

Holdco, a wholly-owned subsidiary of Parent (also resident) holds a controlling position (the “Historical Portion”) in Subsidiary. Parent acquired all the other Common Shares of Subsidiary (the “Recently Acquired Portion”) with an s. 85(1) election to be filed respecting such acquisition.

Proposed Transactions
  1. Parent will wind-up Holdco as described in s. 88(1). As a result of the application of the cost base averaging rules in s. 47, there will be an unrealized gain on each Common Share following the winding-up.
  2. Parent will exchange all its Common Shares of Subsidiary on a s. 85(1) rollover basis for non-voting redeemable retractable non-cumulative preferred shares of Subsidiary (the “New Pref”) and Class A Common Shares with attributes identical to those of the Common Shares other than a different period of notice for shareholders’ meetings and being convertible into Common Shares on a one-for-one basis. The PUC of the Common Shares is allocated to the new shares on a relative FMV basis. The New Prefs will have a cost equaling their redemption amount.
  3. Parent will convert all of the issued Class A Common Shares of Subsidiary into Common Shares.
  4. Subsidiary will declare a cash dividend on the Common Shares.
  5. Subsidiary will effect an additional cash distribution by redeeming all or a portion of the then outstanding New Pref, which will not affect the FMV of the Common Shares.
Purposes

The Class A Common Shares will be created to ensure that there will be a disposition of the Common Shares on the exchange in 2, and the conversion of the Class A Common Shares back to Common Shares in 3 will occur to restore the characteristics of the Common Shares.

The purpose of such exchange is to isolate a portion of the Common Shares’ ACB in the New Pref and to enable the additional cash distribution through the redemption of the New Pref for an amount equal to their ACB.

Rulings

As a result of the acquisition of the Historical Portion by Parent on the wind-up of Holdco, the safe income on hand attributable to the Historical Portion will be averaged across all of the Common Shares held by Parent immediately following the winding-up of Holdco.

The safe income on hand attributable to the Common Shares will not be reduced as a result of a redemption of the New Pref.

Topics and taglines
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Income Tax Act - s. 55(2.1)(c)
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d7 import status
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