Income Tax Severed Letters

Principal Issues: Whether safe income can be averaged across common shares of the same class that are acquired in two separate transactions and whether following a subsection 85(1) transfer where common shares are exchanged for preferred shares and new common shares will the redemption of the preferred shares for their ACB result in a reduction of the safe income associated with the common shares?

Position: The safe income on hand should be averaged across shares of the same class acquired in separate transactions and if there is no inherent gain associated with the preferred shares the redemption of the preferred shares will not result in a reduction of the safe income associated with the common shares.

Reasons: The allocation of safe income on a pro rata basis is consistent with the CRA's existing administrative positions. The safe income on hand associated with common shares that are exchanged for new preferred shares and new common shares should be allocated based on the inherent gain of the shares received if the exchange is made on a rollover basis and the ACB of the shares received equals the ACB of the shares exchanged.