The incorporation on March 15 by a purchaser of a corporation for the purpose of purchasing the assets of another corporation (the vendor) caused the "safe-income determination time" to occur, as this was a trigger under the s. 55(1) definition. On April 4 of that year, the vendor corporation sold its assets at FMV to the new purchasing corporation. Since this occurred after the safe-income determination time, the taxable income from the sale was not included in computing safe income – so that if the vendor then paid a dividend out of the asset sale proceeds, it would be recharacterized as a capital gain because of the lack of safe income.
(a)
Does CRA agree with this result, notwithstanding that the asset sale had already been fully taxed? CRA responded:
Assuming that the incorporation of the corporation is part of the same series of transactions that may create an increase in the total direct interest in a corporation of an unrelated person, we agree that the "safe-income determination time" defined in subsection 55(1) could be the time after that first increase in interest.
However, practical solutions to these types of technical issues exist and therefore the CRA does not consider that a flexible approach is necessary in the[se] circumstances … .
(b)
Is the safe income from the sale of the assets lost or will it be considered in a future computation of safe income? CRA responded:
If the safe income from the sale of the assets is not included in safe income for the purposes of the dividend paid following the sale, this safe income is generally not lost and may be used in the subsequent payment of dividends to the extent that such subsequent dividends are not part of the same series of transactions as the sale of the assets.
In addition, it should be noted that, depending on the facts and circumstances of a particular situation, for example in situations of a total sale of assets of a corporation followed by a winding-up dividend pursuant to subsection 88(2), the CRA would be prepared to consider, after a detailed analysis of a file, that the subject matter of the dividend would not fall within paragraph 55(2.1)(b).