CRA maintains that safe income of pref shares issued on a s. 85 share-for-share exchange matches the exchanged shares’ safe income, with subsequent dividend increases

We have published a webpage providing the questions posed, and summaries of the preliminary oral responses given, at the 2024 CTF CRA Roundtable, held yesterday.

Q.1 was a follow-up to the CRA "Update on Subsection 55(2) ..." (Full paper released on 22 December 2023) which stated that, where a shareholder acquires preferred shares as consideration for the transfer of property on a tax deferred basis, the accrued gain on the property, when subsequently realized by the corporation, would be viewed as contributing to the gain on the preferred shares, and accordingly would be included in the preferred shares’ safe income. In Q.1, CRA indicated that this position would not be extended to where the preferred shares are acquired in exchange for common shares, so that the accrued gains on the underlying property held by the corporation and any of its subsidiaries at the time of the share exchange will not be allocated to the safe income of the preferred shares once realized.

Instead, the allocation of the safe income to the preferred shares would follow CRA’s longstanding position that a portion of the safe income to which the exchanged shares would have been entitled immediately before the exchange simply flows through to the preferred shares. Regarding the safe income realized after the exchange, the preferred shares would generally participate in the safe income of the corporation in accordance with the shares’ dividend entitlement only.

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.1 under s. 55(2.1)(c).