CRA indicates that it will always ask for a safe income estimate when reviewing a proposed spin-off transaction
2020-0861031C6 indicated that, in a spin-off by a “distributing corporation” (DC) to the “transferee corporation” (TC), CRA will monitor whether there has been an appropriate reduction in the adjusted cost base (ACB) of the shares of DC. Leaving aside safe income matters, CRA considers there to be a misalignment if the aggregate ACB of DC shares held by the taxpayer before the spin-off exceeds the aggregate ACB of the remaining DC shares held by the taxpayer after the spin-off, plus the ACB of the spin property (on the assumption that TC is wound up, resulting in the taxpayer directly holding the spin property).
However, CRA indicated that the additional ACB that may be created by the capitalization of safe income (so as to become ACB) must be taken into account. It would appear that, to be compliant, the ACB of the DC preferred shares (which will be cross-redeemed and cancelled under the spin-off), plus the direct safe income (DSI) and indirect safe income (ISI) transferred (i.e., in the case of ISI, through the transfer of shares) to TC, should at least equal the ACB of the spin property (including, where the spin property is shares, safe income that can be capitalized).
The conventional spin-off mechanics involve the creation of cross-shareholdings and a cross-redemption, resulting in the aggregate ACB of the DC shares held by the taxpayer after the spin-off equaling the aggregate ACB of the DC shares held by it before the spin-off minus the ACB of the DC preferred shares created (e.g., under a s. 51 or 86 reorg) and then cancelled under the reorganization.
A more recent interpretation (2021-0889611E5) included an example of a less conventional spin-off transaction entailing a spin-off (through a succession of steps) by Opco (a “child” of Holdco 2 and a “grandchild” of Holdco 1) of one of its properties to Holdco 1. Included is a numerically detailed account (although somewhat cryptic in places) of the computation of the transferred DSI and ISI and of what the normative reduction in the ACB of the shareholdings should be. Analogously to a conventional spin-off transaction, the steps entailed a reduction in the ACB of the Opco shares held by Holdco 2, and in the ACB of the Holdco 2 shares held by Holdco 1, in an amount equaling the cost amount of the spun property.
CRA further indicated that there potentially could be a misalignment - even where ACB equal to that of the spun property is eliminated under the spin-off steps (as occurred here) - if the spun assets had disproportionately high safe income. (On the numbers, that did not occur in this particular example.) Accordingly, “an estimate of such safe income is always necessary to fully assess the situation being ruled upon” regarding a proposed spin-off transaction.
Neal Armstrong. Summaries of 28 May 2021 External T.I. 2021-0889611E5 and of Joan E. Jung, “Changing the Analysis for a Typical Spinout,” Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 2 under s. 55(2.1)(c).