CRA permits safe income to be allocated based on which class of discretionary shares receives dividends

Where a corporation has different classes of discretionary-dividend common shares, CRA effectively considers that the safe income on hand of the corporation can be allocated to whichever class of shares a discretionary dividend is paid on. For example, if Husband holds 99 Class A common shares of Opco and his estranged wife held 1 Class B common share (issued at the same time as the Class A shares, and entitled to only 1% of the remaining property on liquidation), which she has transferred under s. 85(1) to a new Holdco, CRA will accept that a dividend, which is paid only on the Class B share, comes 100% out of all of Opco’s safe income, so that the dividend is tax-free (subject to Part IV tax considerations). In particular, CRA accepts the proposition that the fair market value of the Class B share immediately before the dividend payment reflects the amount of the declared dividend, and also reflects the safe income that will imminently be distributed on the share.

At the 2015 annual CTF conference, CRA indicated (in Q.6(c)) that where a non-participating discretionary share (e.g., a non-cumulative preferred share) has no accrued gain, then a dividend paid thereon which violates the purpose test cannot benefit from safe income - but, where this occurs, CRA is prepared to accept that the safe income on the common shares of the same corporation will not be reduced. CRA has now essentially confirmed this position, but garnished with more detailed analysis.

CRA declined to express a view as to whether an $8,000 reduction in an accrued capital gain of $120,000 was significant. Probably not much should be read into this.

Neal Armstrong. Summary of 3 December 2015 T.I. 2015-0593941E5 F under s. 55(2.1)(c).