Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: The proper allocation of safe income on hand when shares of a corporation are exchanged on a rollover basis for more than one class of shares.
Position: Question of fact. However, any safe income on hand attributable to the old share must be allocated to the new shares proportionally based on the inherent gain in the new shares.
Reasons: The law.
XXXXXXXXXX 2000-000792
Attention: XXXXXXXXXX
April 13, 2000
Dear Sirs:
Re: Calculation of Safe Income
This is in reply to your letter dated February 14, 2000 concerning your request for our views on the allocation of safe income on hand as determined for the purposes of subsection 55(2) of the Income Tax Act ("the Act") to various classes of shares received on a share exchange.
Your request appears to relate to either a proposed series of transactions or a completed series of transactions. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.
It remains a question of fact as to whether a portion of a capital gain that would have otherwise occurred on a disposition of a share but for the dividend would be attributable to income earned or realized by a corporation after 1971 and before the safe income determination time. In this regard, the statement made by Michael Hiltz at page 15:2 in his paper titled "Income Earned or Realized: Some Reflections" published in the 1991 Canadian Tax Foundation Conference Report, is relevant:
"To determine whether a dividend reduces a portion of a capital gain that could reasonably be considered to be attributable to anything other than income earned or realized, it is necessary to analyze the elements that make up the gain on the share."
In situations where a part of the capital gain inherent in the shares of a corporation ("Opco") is crystallized on their transfer to another corporation ("Holdco") by an individual, not all of the individual's potential gain on the transferred shares of Opco will become a potential gain of Holdco. Consequently, it is our approach to apportion the safe income on hand, to which the entire gain is in part attributable, proportionately to each part of the gain. Therefore, the amount of safe income on hand that would be attributable to the Opco shares immediately following the transfer to Holdco will be determined using the following formula:
A x B/C
where:
A is the safe income on hand attributable to the shares of Opco held by the individual immediately before the transfer or safe income determination time relating to the series of transactions which included the transfer
B is the potential gain on the shares of Opco held by Holdco
C is the potential gain on the shares of Opco immediately before their transfer to Holdco.
Furthermore, in the situation where a share of a corporation is exchanged for more than one class of shares of the same corporation on a rollover basis and the adjusted cost base of the new shares to the transferor does not exceed the adjusted cost base of the old shares, it is our view that any safe income on hand attributable to the old shares must be allocated to the new shares proportionally based on the inherent gain in the new shares.
Our comments are provided in accordance with the practice described in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 4 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content