CRA illustrates the streaming of safe income that occurs on a stock dividend to a corporate shareholder
CRA has provided a simple example illustrating the operation of s. 55(2.3), which streams safe income to stock dividend shares and away from the shares upon which the stock dividend is paid, where the dividend recipient is a corporation.
Opco’s two shareholders (Holdco and Ms. X) each own a bloc of 50 common shares with an ACB, FMV and safe income on hand of $5,000, $500,000 and $450,000, respectively. Opco pays a $700,000 stock dividend consisting of preferred shares with an aggregate redemption amount and PUC of $700,000 and $1, respectively.
Because the amount of the stock dividend is deemed to be $350,000 for s. 55(2) purposes, Opco’s safe income that contributes to gain on the 50 Opco common shares of Holdco is deemed to be reduced by $350,000. Holdco now owns half the preferred shares with an ACB pursuant to s. 52(3)(a) of $350,000, and 50 common shares with a FMV of $150,000 and an ACB of $5,000, resulting in an inherent capital gain of $145,000. Thus, Opco has $100,000 of safe income that contributes to the inherent capital gain on Holdco’s original 50 common shares and the other $350,000 of safe income is now reflected in the ACB of Holdco’s preferred shares of Opco.
As for Ms. X, Opco’s safe income of $450,000 that contributes to the gain on her 50 common shares is not reduced by the stock dividend paid, and this safe income of $450,000 will be apportioned between her preferred shares received as a stock dividend, and her original 50 common shares, based on their respective accrued gains, as determined after the payment of the stock dividend.
Neal Armstrong. Summary of 6 June 2017 External T.I. 2016-0658351E5 under s. 55(2.3).