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D. Holtz
JUL 15 1988
Dear Sirs:
This is in response to your letter of June 14, 1988 concerning our February 9, 1988 reply to your previous letter of November 25, 1987.
As you point out, our letter of February 9, 1988 stated "The concept of "safe income" has no relevance in respect of a share held by an individual. Consequently, we cannot offer any comments". This statement was based on the fact that the provisions of subsection 55(2) of the Act only apply to dividends received by a corporation, and do not have application to dividends received by an individual on shares acquired pursuant to the provisions of subsection 73(5) of the Act. Your letter of November 25, 1987 did not indicate any subsequent transfer of the shares to a corporation.
If your enquiry relates to a proposed transaction involving shares which were subject to the provisions of subsection 73(5) of the Act, it should be the subject of a request for an advance income tax ruling submitted in accordance with Information Circular 70-6R, dated December 18, 1976. If your enquiry relates to completed transactions it should be referred to the appropriate District Office.
However, it is our opinion that if shares of a subject corporation were transferred by a parent to an individual utilizing the provisions of subsection 73(5) of the Act and were subsequently transferred by the individual to a corporation, the concept of "income earned or realized" would be relevant. If the adjusted cost base of the shares of the subject corporation to the corporate owner is the same as the adjusted cost base of the shares to the parent, the "income earned or realized" by the subject corporation may include the "income earned or realized" by the subject corporation during the period when the shares were owned by the parent as well as when the shares were owned by the child provided that the " income earned or realized" is on hand and is reflected in the gain inherent in the shares of the subject corporation. The "income earned or realized" would not be on hand or reflected in the gain on the shares of the subject corporation if it has been extracted from the corporation to pay a vendor of the shares. This would be the case if a debt was assumed or incurred by a corporate purchaser, the two corporations were amalgamated, and the shares of the amalgamated corporation were transferred to another corporate purchaser utilizing the provisions of subsection 85(1) of the Act. In this case, the "income earned or realized" would be impaired by the liability of the corporation.
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch