Example 12 of the "CRA Update on Subsection 55(2) and Safe Income: Where are we Now?” was essentially as follows:
In Year 1: Holdco1 transferred goodwill with an FMV of $500 and nominal cost amount on a rollover basis to Opco in consideration for preferred shares with a $500 redemption amount and nominal dividend entitlement; and Holdco2 subscribed a nominal amount for Opco common shares. While Holdco2 held its common shares, Opco earned a safe income of $500 that is represented by cash on hand. The preferred shares are redeemed with this cash at a time that the FMV of the common shares is $500.
In this situation, although the cash that has been generated by Opco with its safe income no longer supports the value of the common shares held by Holdco2, the safe income of $500 that is considered to contribute to the gain on the common shares of Opco held by Holdco2 is considered to remain unchanged.
After commenting on the application of s. 55(3)(a) in the context of Example 12 (viewed as “a share redemption that results in a deemed dividend that is supported by little safe income, but where the dividend is technically exempted by paragraph 55(3)(a)”) CRA then returned to Example 12, and stated:
Ultimately, whether or not the exemption in paragraph 55(3)(a) applies will have no impact on the safe income of the common shares in Example 12. In addition, as stated in the Update, the gain realized on the sale of goodwill for $500 or less could not constitute safe income on the common shares because such gain does not contribute to the gain on the common shares, even when the goodwill was sold after the redemption of the preferred shares. If, on the other hand, the goodwill were sold for more than $500, the gain on the excess over $500 would constitute safe income on the common shares.