CRA indicates that the safe income of common shares acquired on a s. 88(1) wind-up is averaged with that of directly-purchased common shares

A Canadian corporate taxpayer (“Parent”) had held a majority of the common shares of an indirect Canadian subsidiary (“Subsidiary”) for some time through a wholly-owned direct subsidiary (“Holdco”), and recently acquired the balance of the common shares of Subsidiary directly.

CRA ruled that upon a s. 88(1) winding-up of Holdco (so that the two shareholdings were combined in Parent’s hands), the safe income on hand attributable to the historical shareholding would be averaged across all of the common shares held by Parent immediately following the winding-up.

Parent then effects a “dirty s. 85” exchange of its common shares of Subsidiary for new common shares and preferred shares with a cost equaling their redemption amount, and then has a cash dividend paid on the common shares and has the preferred shares redeemed for cash. CRA ruled that the pref redemption would not reduce the safe income on hand attributable to the common shares – noting in its summary that this was because there was no inherent gain on such pref.

Neal Armstrong. Summary of 2020 Ruling 2020-0854091R3 under s. 55(2.1)(c).