16 June 1997 External T.I. 9711005 - SAFE INCOME/PART IV TAX

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

5-971100
XXXXXXXXXX J. Teixeira

Attention: XXXXXXXXXX

June 16, 1997

Dear Sirs:

This is further to our letter dated June 26, 1995, in response to a request from you, dated June 6, 1995, for our views on the application of subsection 55(2) of the Income Tax Act (the "Act").

In our response, we indicated that subsection 55(2) of the Act will only apply to the amount by which a taxable dividend, that arose as a result of the redemption of shares of a corporation, exceeds the aggregate of the amount of the "safe income on hand" attributable to such shares and 4 times the amount of any Part IV tax payable by the recipient in respect of such dividend. These comments should have clarified that the amount of the dividend to which subsection 55(2) would not apply is the aggregate of the amount of the dividend subject to Part IV tax and the amount, if any, by which the amount of safe income on hand exceeds the amount of the dividend subject to Part IV tax.

It is our view, that when a corporation receives a dividend, part of which is attributable to safe income on hand and part subject to tax under Part IV of the Act, it is not possible to treat the part attributable to safe income on hand as not subject to Part IV tax. Any dividend paid by the payer corporation is considered to be paid first out of the safe income on hand attributable to the recipient corporation's shares of the payer corporation. Where a particular corporation is subject to Part IV tax because a payer corporation is connected with the recipient corporation and the payer corporation receives a dividend refund as a result of the payment of the taxable dividend, by virtue of paragraph 186(1)(b), the Part IV tax will be attributable to the first part of the dividend which is equal to 4 times1 the dividend refund receivable by the payer corporation. Therefore, the portion of the dividend received by the recipient corporation that would be subject to tax under Part IV of the Act would also include any safe income attributable to the shares of the payer corporation held by the recipient corporation. Consequently, the recipient corporation would not have to designate any amount under paragraph 55(5)(f) of the Act in any situation where the portion of the taxable dividend that is subject to tax under Part IV of the Act exceeds the safe income on hand of the corporation.

The above comments are not rulings and, in accordance with the practice referred to in Information Circular 70-6R3 dated December 30, 1996, are not binding on Revenue Canada.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
endnotes

1 For taxation years that end before July 1995.