Principal Issues: Shareholders of a public corporation ("Pubco") would transfer a portion (1/3) of their shares of the capital stock of Pubco in favour of a newly-created corporation ("Newco"). Subsection 85.1(1) would apply to these transfers of shares. Pursuant to paragraph 85.1(1)(b), the cost to Newco of the shares of the capital stock of Pubco would be deemed to be the paid-up capital of the shares transferred immediately before the transfer. Pubco would then redeem the shares of its capital stock held by Newco. Subsection 84(3) would apply to such redemption of shares. Whether, in these circumstances, Newco could benefit from a portion (1/3) of the safe income on hand of Pubco generated prior to the acquisition of the shares of the capital stock of Pubco by Newco.
Position: Yes. Under the terms of subsection 55(2), it is necessary to analyse the capital gain inherent in the shares of the capital stock of Pubco held by Newco at the time of their redemption, in order to determine the extent to which the gain is attributable to safe income on hand or to something other than safe income on hand. In the particular situation described above and considering, among other things, that the cost to Newco of the Pubco shares acquired from the public will be deemed to be the paid-up capital of such shares, it would seem, at first glance, that a portion of the capital gain inherent in the shares of the capital stock of Pubco held by Newco at the time of their redemption would be reasonably attributable to 1/3 of the safe income on hand of Pubco. CRA's general position is that the safe income on hand of a share is normally limited to the period during which the shareholder held the share (the "holding period"). The "holding period" general principal is mainly based on the fact that the pre acquisition safe income on hand is, in most cases, reflected in the adjusted cost base of the shares to a particular shareholder and therefore cannot contribute to the gain on those shares during the shareholder's holding period. However, there are exceptions to this general principle, such as when the calculation of safe income on hand involves shares acquired following the exercise of options or as a result of a stock dividend, or when the shares are acquired on a roll-over basis. In these situations and depending on the circumstances, it is possible that safe income on hand accrues on a share before it is owned by a particular person. In the situation described above, it would be inappropriate to apply the "holding period" general principle since Pubco's safe income on hand existing at the time of the acquisition of the Pubco shares by Newco would not be reflected in the cost of the Pubco shares to Newco
Reasons: Wording of the Act and previous positions.