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:
If Holdco purchases Opco for full fair market value at a time when Opco has unrealized appreciation in certain assets, will gains realized on subsequent disposition of those assets result in "safe income on hand"?
Position:
Not to the extent gains were accrued prior to acquisition of Opco shares.
Reasons:
The subsequent realization of such accrued gains does not contribute to the gain in the Opco shares since their appreciation has already been reflected in the fair market value paid for the Opco shares.
2000-005316
XXXXXXXXXX Karen Power, C.A.
(613) 957-8953
Attention: XXXXXXXXXX
December 11, 2000
Dear Sirs:
Re: Subsection 55(2) - Safe Income
We are writing in reply to your letter of October 19, 2000 wherein you requested our opinion regarding the computation of safe income for a particular holding period.
You have outlined a situation where Holdco purchases Opco for full fair market value at a time when Opco has unrealized appreciation in certain assets, such as inventory or capital property. Subsequent to that purchase, Opco sells the appreciated assets and recognizes the resulting gain for tax purposes. All other things being equal, the recognition of this taxable income will not have increased the value of the Opco shares because the appreciation in the property was already reflected in the fair market value that Holdco paid for the Opco shares.
Specifically, you have asked that we confirm that this post-acquisition income will not be "safe income" or "safe income on hand" of Opco in respect of Holdco's shares.
Subsection 55(2) applies to a dividend that reduces the portion of the unrealized gain on the shares that could reasonably be attributable to "anything other than income earned or realized". Paragraphs 55(5)(b), (c) and (d) define "income earned or realized" or "safe income" for purposes of subsection 55(2). "Income earned or realized" or "safe income" with respect to a share of a corporation refers to the income earned by any corporation during the holding period of a particular share of a corporation that can reasonably be considered to be allocable to that share in the particular circumstances. "Safe income on hand" at a particular time with respect to a share of a corporation held by a particular share holder is the portion of the income earned or realized by any corporation (safe income) during the relevant period of time that could reasonably be considered to attribute to the capital gain that would be realized on a disposition at fair market value of the share at that time.
Subsection 55(2) requires a detailed analysis of the elements that make up the capital gain that otherwise would have arisen but for the dividend on a fair market value disposition of the share in order to determine whether such reduction in the gain can reasonably be attributable to something other than the amount of safe income on hand 1991 CR - Michael A. Hiltz, "Income Earned or Realized: Some Reflections"- at page 15:2.
Notwithstanding the above, and as a practical matter, normally we do not require a detailed analysis of all the elements making up the capital gain on a share as long as safe income on hand is computed pursuant to our published guidelines. In this regard, our published guidelines attempt to ensure that the legislative requirement (i.e. that the dividend not reduce the portion of the gain which is attributable to anything other than safe income) is respected.
In our view, while the safe income realized by Opco subsequent to the acquisition of control would be increased by the amounts included in its net income as a result of the sale of the appreciated assets, these realized amounts do not increase any capital gain inherent in the Opco shares after the acquisition of control to the extent that they had accrued prior to that time and should, therefore, be deducted from safe income in the calculation of safe income on hand.
We trust our comments will be of assistance to you. However, as noted in Information Circular 70-6R3 issued on December 30, 1996, the above comments are not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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