CRA indicates that the payment of a pre-closing dividend of significant excluded assets by the target to its parent likely would engage s. 55(2) where no safe income
A corporation resident in Canada ("Parent") owning 100% of "Target" accepts an offer from an unrelated third party ("Purchaser") to purchase all of the Target shares for $3 million, with the sale agreement specifying that assets which Purchaser does not wish to acquire ("Excluded Assets") are assigned a value of zero. The ACB of the Target shares is $3 million and the safe income attributable to them is nil.
Immediately prior to its sale to Purchaser, Target pays a dividend in kind of $250,000 (the "Dividend") to Parent by transferring an Excluded Asset to Parent.
CRA rejected a suggestion that since, whether or not the Dividend was paid, the value of the Target shares would be $3 million, and the capital gain would be nil, s. 55 could not apply, stating:
[I]t seems difficult to argue that none of the purposes of the payment or receipt of the Dividend is to significantly decrease the FMV of the shares of the capital stock of Target.
Consequently, subsection 55(2) should likely apply … .