CRA indicates no need for CRA flexibility re safe income issues from early Buyco formation
A purchaser incorporated a Buyco to acquire the assets of the vendor corporation and then, a few weeks later, the net asset proceeds on the closing of the sale were dividended by the vendor to its corporate shareholders. Did Buyco’s incorporation trigger a "safe-income determination time" such that the taxable income from the sale was not included in computing safe income, thereby resulting in a capital gain on the associated dividend of that taxable income? CRA responded:
Assuming that the incorporation of the corporation is part of the same series of transactions that may create an increase in the total direct interest in a corporation of an unrelated person, we agree that the "safe-income determination time" defined in subsection 55(1) could be the time after that first increase in interest.
However, practical solutions to these types of technical issues exist and therefore the CRA does not consider that a flexible approach is necessary in the[se] circumstances … .
As to whether safe income from the sale would be permanently lost, CRA stated:
If the safe income from the sale of the assets is not included in safe income for the purposes of the dividend paid following the sale, this safe income is generally not lost and may be used in the subsequent payment of dividends to the extent that such subsequent dividends are not part of the same series of transactions as the sale of the assets.
A mechanical application of the “in contemplation of” extension of “series” in s. 248(1) under Copthorne would suggest that a subsequent payment of a dividend out of such safe income would take that safe income into account and, therefore, would necessarily be part of the same series – so that these words provide some encouragement that CRA can apply the “series” concept more narrowly than this.
CRA further indicated:
[I]n situations of a total sale of assets of a corporation followed by a winding-up dividend pursuant to subsection 88(2), the CRA would be prepared to consider, after a detailed analysis of a file, that the subject matter of the dividend would not fall within paragraph 55(2.1)(b).