CRA finds that negative safe income of a subsidiary need not reduce the SIOH of the parents’ shares

Holdco had two very different subsidiaries. It subscribed $100 for the shares of Opco 1, which realized $900,000 in safe income over the years, and its shares now have a fair market value (FMV) of $1,000,000. Holdco also subscribed $499,900 for the shares of Opco 2, which realized operating losses of $2,000,000 in building up an intangible asset. As it financed the losses in part with third-party debt of $1,500,100, the shares of Opco have an FMV of $499,900. Should the safe income attributable to the shares of Holdco be reduced by the negative safe income of Opco 2?

After noting that (based on Brelco) “the losses of an affiliate can reduce a parent corporation's safe income on hand even if the parent corporation has not directly or indirectly guaranteed the affiliate's losses.” CRA stated:

[T]he fact that Opco 2's trading losses ultimately did not have the net effect of reducing the fair market value of the Holdco shares, and assuming that no entity in the Holdco Group had guaranteed or financed the debt of Opco 2, the CRA is of the view that Opco 2's trading losses should not reduce the consolidated safe income attributable to the shares of the capital stock of Holdco. … [T]he safe income attributable to the shares of the capital stock of Holdco should be $900,000, which is the safe income attributable to the shares of the capital stock of Opco 1 held by Holdco.

Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.10 under s. 53(2.1)(c).