DEC 6 1989
TO Toronto District Office 198-1-3
C. Lau Large File Case Manager
FROM Specialty Rulings Directorate A.A. Cameron (613) 957-2115
SUBJECT: XXXXXXXX
You have asked for our views with regard to the adjustment requested by XXXX to safe income which would have the effect of increasing the deemed dividend deductible by it pursuant to subsection 112(1) of the Act and reducing its proceeds of disposition of the XXXX shares.
As indicated in our earlier memorandum to you concerning the XXXX situation (to which you have referred), our position remains that a stub period profit or loss is to be taken into account in calculating safe income as stated in Mr. Robertson's above-mentioned paper. Therefore, we would not disagree with your decision in the situation at hand to allow an increase to safe income previously determined for the omitted stub period profit. In our view the decision to allow such an adjustment must be made on a case by case basis having regard to the relevant facts of the particular situation e.g. the reason for the omission, whether or not bona fide efforts were made by the taxpayer to accurately calculate safe income, etc.
Although it is appropriate that the stub period profit be included in the calculation of safe income, the relevant amount of safe income for the purposes of subsection 55(2) of the Act is that which is on hand at the commencement of the series of transactions or events in which XXXX disposed of its XXXX shares to a person with whom it was dealing at arm's length for the purposes of the Act. You should therefore insure that you do not include safe income that was earned after the commencement of the series of transactions.
Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch