Principal Issues: Whether paragraph 55(3)(a) applied in example 12 of the November 2023 CRA's presentation and the effect on the safe income of the common shares.
Position: General comments on paragraph 55(3)(a) and confirmation that safe income of the common shares is not affected whether or not paragraph 55(3)(a) applied.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
6. Safe income
This question is in response to the document entitled “CRA Update on Subsection 55(2) and Safe Income: Where are we Now?” (footnote 1) (the “Update”) published by the Canada Revenue Agency (CRA).
We are seeking clarification regarding the conclusion in Example 12, which states that “[a] redemption of the preferred shares for its fixed redemption amount should not affect the entitlement to safe income of the common shares”. This comment seems to us to be consistent with the CRA's longstanding position.
However, Example 12 does not specify whether the share redemption described therein benefits from the exception in paragraph 55(3)(a).
Question to the CRA
Can the CRA comment on the application of paragraph 55(3)(a) in the circumstances of Example 12?
CRA Response
The application of paragraph 55(3)(a) will depend on the facts and circumstances of a particular situation and whether all of the conditions for the application of paragraph 55(3)(a) are satisfied.
However, in the context of 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), the redemption in question should be analyzed with respect to the purpose of the dividend resulting from the redemption and the GAAR could potentially apply in such a situation. In this regard, see Example 5 in the Update regarding a share buyback. The ITRD has refused to grant favourable advance rulings regarding the application of paragraph 55(3)(a) in those circumstances.
On the other hand, in the context of a share redemption the purpose of which is ultimately to finance the personal needs of a shareholder-individual, for example in a situation involving a redemption of freeze preferred shares of the capital stock of an operating corporation held by a holding company of the shareholder-individual followed by the payment of that amount by the holding company to the shareholder-individual, the CRA would accept that paragraph 55(3)(a) could apply.
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.
Marc Séguin
October 10, 2024
2024-102888
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, “CRA Update on Subsection 55(2) and Safe Income: Where are we Now?”, April 10, 2024.