24(1)
903043
M.P. Sarazin
(613) 957-2125
19(1)November 26, 1990
Dear Sirs:
We are writing in response to your letter dated October 25, 1990 wherein you requested a technical interpretation regarding the calculation of income earned or realized ("safe income") under subsection 55(2) of the Income Tax Act (Canada) (the "Act") in the following situation.
Facts
1.
2.
24(1)
3.
You are of the view that the safe income attributable to the shares at the time of their transfer to A Co under subsection 85(1) of the Act would include the safe income attributable to those shares immediately before their transfer by H under subsection 73(1) of the Act. Therefore, A Co could pay a $50,000 safe dividend.
It appears that the interpretation you seek relates to specific taxpayers and therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling car be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.
The Department's views on the computation of safe income were expressed in Mr. J.R. Robertson's address to the 1981 Conference of the Canadian Tax Foundation. These views were subsequently updated by Mr. M.A. Hiltz at the 1984 Corporate Management Tax Conference, as well as by Mr. R.J.L. Read at the 1988 Conference of the Canadian Tax Foundation. On page 85 of the Report of Proceedings of the Thirty-third Tax Conference, Mr. Robertson states:
"When a corporation acquires a share as the result of a section 85 roll-over such a transferred share will retain its share of safe income that could have been paid as a safe dividend immediately before the transfer. In effect the transferee's holding period in respect of such a transferred share includes the transferor's holding period. This is reasonable because the transferor's potential gain on those shares becomes the transferee's potential gain".
Similarly, it is our opinion that where shares of a subject corporation are transferred by one spouse (the "Transferor") to another spouse (the "Transferee") under the provisions of subsection 73(1) of the Act and such shares are subsequently transferred by the Transferee to a corporation ("Newco") under the provisions of subsection 85(1) of the Act, provided that the adjusted cost base of the shares of the subject corporation to Newco is the same as the adjusted cost base of those shares to the Transferor, the safe income attributable, to those shares of the subject corporation held by Newco would include the safe income attributable to those shares during the period that the shares were owned by the Transferor and the Transferee.
It should be noted that the amount of safe income must be on hand when a "safe dividend" is paid. As mentioned in Mr. Robertson's paper, there could be cases where a computation of safe income results in an amount greater than that which would be paid as a safe dividend. It is necessary, therefore, to calculate not only the amount of safe income, but also to determine the amount of "safe income on hand" out of which a safe dividend may be paid. A dividend paid which exceeds this latter
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amount may be subject to the provisions of subsection 55(2) of the Act, as the dividend would reduce the portion of the gain on the shares which is attributable to something other than safe income.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of Information Circular 70-6R2, this is not an advance income tax ruling and is therefore not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch