MEMORANDUM
JUL 22 1988
To Toronto District Office 142.5.3 Large File Case
From Specialty Rulings Directorate D. Webb (63) 957 2115
Subject: XXXX
This is in response to your memorandum of November 23, 1987 and our initial reply of February 24, 1928.
As indicated in our memorandum of February 24, 1988 "income earned or realized" for purposes of subsection 55(2) of the Act ("safe income") encompasses income earned by any corporation after 1971 and before the commencement of the series of transactions or events. Income for the purposes of this calculation is initially based on the finally determined income for tax purposes for the relevant taxation years during which the particular taxpayer owned the shares. Any audit adjustments that impact on the income for tax purposes for the relevant years should be taken into account in calculating the relevant safe income.
However, when it is not a question of aggressive or abusive filing we would not disagree with your adopting an administrative position, on a case by case basis, which would only consider those adjustments that were known, or should have been known, to the taxpayer at the time of the payment of a dividend prior to a sale of the shares, and ignoring audit adjustments made subsequent to the date of sale; particularly when changes are initiated by the subsequent shareholder (e.g. increasing the claim for discretionary deductions such as CCA). In our view this is consistent with the premise that, at the time of the sale of the shares, the parties had determined the portion of the gain which was attributable to something other than safe income. However, this position may result in a duplication of safe income; once for the vendor, and a second time for the purchaser via reduced deductions in future years.
Yours truly,
Director Reorganization and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch