Robert J.L. Read, "Section 55: A Review of Current Issues," 1988 Conference Report (Canadian Tax Foundation), 18:1-28

Wind-up of transferred corporation into the transferee corporation accomplishes indirect transfer; cf. its amalgamation with TC (p. 18:16)

[A] transfer of property by a particular corporation to a wholly-owned subsidiary of a shareholder corporation, followed by a winding up of the subsidiary into that shareholder corporation, would constitute an indirect transfer of property by the particular corporation to the shareholder corporation for the purposes of paragraph 55(3)(b). In contrast, a transfer by a particular corporation to a wholly-owned subsidiary of a shareholder corporation, followed by an amalgamation described in subsection 87(1) of the subsidiary and that shareholder corporation, would not be an indirect transfer of property by the particular corporation to a transferee corporation that was a shareholder of the particular corporation immediately before the transfer, because the corporation resulting from the amalgamation is deemed by paragraph 87(2)(a) to be a new corporation.

Safe income excludes income earned after the commencement of the series (p. 18:4)

The period of time relevant to the calculation of “ the income earned or realized” by a corporation in relation to a particular share of that corporation will commence on the later of January 1, 1972 and the date of acquisition of that share, and will end “ before the transaction or event or the commencement of the series of transactions or events” referred to in paragraph 55(3)(a). Therefore, any income earned or realized by the corporation after the transaction or event or the commencement of the series of transactions or events referred to in paragraph 55(3)(a) would not be included in the safe income of a share of the corporation even if this income was earned or realized as a result of the transactions undertaken as part of that series. For example, any recaptured capital cost allowance or capital gain arising as a result of a disposition of any property of the corporation during the course of a series of transactions referred to in paragraph 55(3)(a), but after the commencement of that series, will not be included in computing the safe income of any shares of the corporation at the particular time.

Series began no later than commencement of sales negotiations (pp. 18:24-25)

Question 2

The shareholders of A Co enter into preliminary negotiations with B Co regarding the sale of shares of A Co in February of year 1. The two parties come to terms in September of year 1, agreeing that the transaction will close on November 1 of year 1. Before the sale of the shares of A Co, the shareholders of A Co incorporate Holdco and transfer their shares to Holdco. A Co pays a dividend to Holdco. When does the period for determining the portion of this dividend attributable to safe income earned by A Co end?

RCT’s Response

The period for calculating safe income of A Co will end with the commencement of the series of transactions or events referred to in paragraph 55(3)(a). Subsection 248(10) is applicable in determining what constitutes such a series. When this series of transactions or events commences in any particular case is a question of fact that can be determined only on the basis of an examination of all the relevant facts of a particular case. In this case, it is unlikely that the period could be considered to end later than the commencement of the negotiations in February of year 1.