Principales Questions: A partnership is the sole shareholder of a corporation ("Subco"). An individual has transferred his partnership interest to a holding corporation ("Holdco") in consideration for preferred shares of the capital stock of Holdco. Subsection 85(1) applied with respect to the transfer. The agreed amount was the adjusted cost base of the partnership interest and the fair market value of such interest was higher than the ACB. Before the transfer to Holdco, safe income could be attributed to the shares of the capital stock of Subco. Should the safe income attributable to the shares of the capital stock of Subco (at the time of the transfer of the interest of the partnership by the individual) be considered in computing the safe income attributable to the preferred shares of the capital stock of Holdco held by the individual?
Position Adoptée: Based on the wording of subsection 55(2), the CRA applies a certain "consolidation approach" in the computation of safe income in situations similar to the one described above. In such a case, depending on the circumstances, the capital gain that would result from a disposition of the preferred shares of the capital stock of Holdco could reasonably be considered to be attributable in part to the safe income generated by Subco during the holding period by the individual of his partnership interest, provided that the income earned or realized by Subco was not received by the partnership before the transfer of the interest and that the fair market value of the interest at the time of the transfer is higher than its ACB. Therefore, it is possible that part of the safe income generated by Subco immediately before the time of the transfer of the interest in the partnership could be reasonably attributable to the preferred shares of the capital stock of Holdco received by the individual as consideration for the transfer of the partnership interest. Depending on the circumstances and the relevant facts occurring after the transfer of the interest in the partnership, that part of the safe income generated by Subco attributable to the preferred shares of the capital stock of Holdco could change overtime and be replaced by safe income generated at Holdco's level. Double counting issues are also briefly mentioned.
Raisons: Wording of the Act and previous positions.