CRA considered that s. 55(2) did not apply to dividends paid only for asset protection and QSBC-status purposes, and that safe income was allocated between 2 classes of participating shares pro rata to their dividend entitlements

Two unrelated individuals hold a portion of their equal investments in Opco in the form of equal direct common shareholdings and the balance through an equally owned Holdco, which holds Class X shares of Opco that are entitled to receive a proportion of the earnings of Opco and are redeemable for an amount equal to that proportionate amount of such undistributed earnings plus their nominal issuance price.

CRA was guardedly amenable to the proposition that dividends paid on the Class X shares could be considered to be paid only for purposes of asset protection and eliminating excess liquidity that could prejudice this status of the common shares as qualified small business corporation shares.

If it were necessary to rely on the safe income safe harbour, CRA applied the Robertson rule that “income will be attributable to a particular class of shares in the same ratio in which each class would be entitled if all earnings of the corporation, but not share capital, were to be distributed,” so that the safe income earned or realized annually following the issuance of the Class X Shares could be proportionately allocated based on the number of shares of each class. If safe income was lower than the earnings, the Class X shares would bear a pro rata portion of the deficiency (even if the share terms purported to limit the distribution and redemption entitlement of the Class X shares to X% of the safe income).

Neal Armstrong. Summaries of 6 April 2017 External T.I. 2016-0658841E5 Tr under s. 55(2.1)(b) and s. 55(2.1)(c).