11 October 2013 APFF Roundtable Q. 18, 2013-0495851C6 F - Safe income adjustments

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55(5) 12(2.2) 42 12(1)(x) 55(2)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: Under 3 different scenarios, what is the impact on the safe income computation of Opco additional income tax paid by Opco for taxation years prior to the date of acquisition of its shares? 1- Nothing is provided under the share purchase agreement with respect to the additional income tax paid by Opco? 2- Price adjustment clause provided under the share purchase agreement. 3- Vendor is responsible for the payment of any additional income tax payable by Opco under the share purchase agreement.

Position: 1- Additional income tax paid would reduce safe income on hand of Opco. 2- Same as in first scenario for Opco and reduction of the cost of shares of Opco for Purchaserco 3- Same as in first scenario but impact of paragraph 12(1)(x) and subsection 12(2.2) must be taken into consideration.

Reasons: 1- Additional income tax paid would reduce safe income on hand that can reasonably be considered as contributing to the gain inherent in the Opco's shares. 2- Same as scenario 1. 3- Same as scenario 1 depending on the situation and the application of paragraph 12(1)(x) or subsection 12(2.2).

APFF FEDERAL TAX ROUNDTABLE 7 OCTOBER 2013
APFF CONFERENCE 2013

Question 18

Safe income and compliance

Generally, the calculation of safe income attributable to a shareholder begins when the shareholder becomes a shareholder. Take the example of a corporation ("Buyco") that acquired all the shares of the capital stock of another corporation ("Opco") on January 15, 2010 held by the seller ("Sellco"). Normally, the safe income attributable to the shares of the capital stock of Opco held by Buyco will be computed from January 15, 2010. We wish to know the position of the CRA when adjustments are made to the net income of the corporation for the years in Question before the acquisition of the shares. For example, in an Opco tax audit for the years 2008 and 2009 conducted in 2011, Opco's net income is increased.

Questions to the CRA

(a) How does the CRA's reassessments of the 2008 and 2009 years impact the calculation of Opco's safe income attributable to the shares of its capital stock held by Buyco?

(b) Would the answer be different if the agreement of purchase and sale for the shares of the capital stock of Opco provided for a price adjustment clause for the shares of the capital stock of Opco acquired by Buyco in the event of a reassessment of a taxation year prior to the sale of shares of the capital stock of Opco?

(c) Would the answer be different if the agreement of purchase and sale for shares of the capital stock of Opco included a clause that makes Sellco liable for the amount of tax relating to any reassessment of a taxation year prior to the sale of the shares of the capital stock of Opco?

CRA response to Question 18(a)

In the situation where nothing in particular is provided in the agreement of purchase and sale for the shares of the capital stock of Opco respecting the amount of additional income tax payable by Opco, the amount of additional tax paid by Opco, in general, would reduce the safe income on hand attributable to the shares held by Sellco for the purposes of subsection 55(2). In such a situation, it appears to us that the payment of the additional tax by Opco would have the effect of reducing the safe income on hand that can reasonably be considered to contribute to the gain on the shares of the capital stock of Opco held by Buyco.

CRA response to Question 18(b)

In the situation where the agreement of purchase and sale contains an adjustment clause to the price for the shares payable by Buyco by reason of a reassessment sustained by Opco, the amount received by Buyco by reason of the price adjustment clause, in general, would reduce the acquisition cost of the shares of Opco.

Furthermore, the amount of the additional tax payable by Opco by reason of the reassessment for a taxation year ending prior to the acquisition of control would, in general, have the same effect on Opco’s safe income on hand as in situation (a) above.

CRA response to Question 18(c)

In the situation where the agreement of purchase and sale for the shares of the capital stock of Opco provides that Sellco is responsible for the amount of any reassessment for a taxation year prior to the acquisition of the shares and to the extent that Opco received or is considered to have received from Sellco an amount equivalent to the amount of additional tax arising under the reassessment, the calculation of the safe income on hand attributable to the Opco shares held by Buyco would need to take into account the application of paragraph 12(1)(x) or subsection 12(2.2) to the compensation received from Sellco.

Generally, the calculation of safe income attributable to a shareholder begins when the shareholder becomes a shareholder. Take the example of a corporation ("Buyco") that acquired all the shares of the capital stock of another corporation ("Opco") on January 15, 2010 held by the seller ("Sellco"). Normally, the safe income attributable to the shares of the capital stock of Opco held by Buyco will commence on January 15, 2010. We wish to know the position of the CRA when adjustments are made to the net income of the corporation for the years in question before the acquisition of the shares. For example, in an Opco tax audit for the years 2008 and 2009 conducted in 2011, where Opco's net income was increased.

Questions à l'ARC

(a) How does the CRA's 2008 and 2009 reassessments impact the calculation of Opco's safe income attributable to the shares of the capital stock held by Buyco?

(b) Would the answer be different if the purchase / sale agreement for the shares of the capital stock of Opco provided for a price adjustment clause of the shares of the capital stock of Opco acquired by Buyco in the event of a reassessment of a taxation year prior to the sale of shares of the capital stock of Opco?

(c) Would the answer be different if the purchase / sale agreement for shares of the capital stock of Opco included a clause that makes Sellco liable for the amount of tax relating to any reassessment of a taxation year prior to the sale of the shares of the capital stock of Opco?

CRA response to question 18(a)

In the context where nothing in particular is provided in the purchase contract of the shares of the capital stock of Opco respecting the amount of additional income tax payable by Opco, the amount of additional tax paid by Opco, in general, would reduce the safe income on hand attributable to the shares held by Sellco for the purposes of subsection 55(2). In such a situation, it appears to us that the payment of the additional tax by Opco would have the effect of reducing the safe income on hand that can reasonably be considered to contribute to the gain on the shares of the capital stock of Opco held by Buyco.

CRA response to question 18(b)

In the situation where the purchase contract…contains a price adjustment clause to the price for the shares payable by Buyco by reason of a new assessment sustained by Opco, the amount received by Buyco by reason of the price adjustment clause, in general, would reduce the acquisition cost of the shares of Opco.

Furthermore, the amount of the additional tax payable by Opco by reason of the new assessment for a taxation year ending prior to the acqusisition of control would, in general, have the same effect on Opco’s safe income on hand as in situation (a) above.

CRA response to question 18(c)

In the situation where the purchase contract for the shares of the capital stock of Opco provides that Sellco is responsible for the amount of any new assessment for a taxation year subsequent to the acquisition of the shares and to the extent that Opco received or is deemed to have received from Sellco an amount equivalent to the amount of additional tax arising under the new assessment, the calculation of the safe income on hand attributable to the Opco shares held by Buyco would need to take into account the application of paragraph 12(1)(x) or subsection 12(2.2) to the compensation received from Sellco.

Marc Séguin
2013-049585

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Text of Severed Letter

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.

Principales Questions: Under 3 different scenarios, what is the impact on the safe income computation of Opco additional income tax paid by Opco for taxation years prior to the date of acquisition of its shares? 1- Nothing is provided under the share purchase agreement with respect to the additional income tax paid by Opco? 2- Price adjustment clause provided under the share purchase agreement. 3- Vendor is responsible for the payment of any additional income tax payable by Opco under the share purchase agreement.

Position Adoptée: 1- Additional income tax paid would reduce safe income on hand of Opco. 2- Same as in first scenario for Opco and reduction of the cost of shares of Opco for Purchaserco 3- Same as in first scenario but impact of paragraph 12(1)(x) and subsection 12(2.2) must be taken into consideration.

Raisons: 1- Additional income tax paid would reduce safe income on hand that can reasonably be considered as contributing to the gain inherent in the Opco's shares. 2- Same as scenario 1. 3- Same as scenario 1 depending on the situation and the application of paragraph 12(1)(x) or subsection 12(2.2).

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 11 OCTOBRE 2013
APFF - CONGRÈS 2013

Question 18

Le revenu protégé et la conformité

En règle générale, le calcul du revenu protégé attribuable à un actionnaire débute à compter du moment où ce dernier devient un actionnaire. Prenons l'exemple d'une société (« Acheteurco ») qui a acquis la totalité des actions du capital-actions d'une autre société (« Opco ») le 15 janvier 2010 que détenait le vendeur (« Vendeurco »). Normalement, le revenu protégé attribuable aux actions du capital-actions d'Opco détenues par Acheteurco débutera à compter du 15 janvier 2010. Nous désirons connaître la position de l'ARC lorsque des ajustements sont apportés au revenu net de la société pour les années se rapportant avant l'acquisition des actions. Par exemple, lors d'une vérification fiscale d'Opco pour les années 2008 et 2009 effectuées en 2011, et où le revenu net d'Opco a été augmenté.

Questions à l'ARC

a) De quelle manière la nouvelle cotisation de l'ARC pour les années 2008 et 2009 a-t-elle une incidence sur le calcul du revenu protégé d'Opco attribuable aux actions du capital-actions détenues par Acheteurco?

b) Est-ce que la réponse serait différente si le contrat d'achat/vente des actions du capital-actions d'Opco prévoyait une clause de rajustement du prix des actions du capital-actions d'Opco acquises par Acheteurco en cas de nouvelle cotisation d'une année d'imposition antérieure à la vente des actions du capital-actions d'Opco?

c) Est-ce que la réponse serait différente si le contrat d'achat/vente des actions du capital-actions d'Opco prévoyait une clause qui rend responsable Vendeurco concernant le montant d'impôt relatif à toute nouvelle cotisation d'une année d'imposition antérieure à la vente des actions du capital-actions d'Opco?

Réponse de l'ARC à la question 18 a)

Dans un contexte où rien de particulier n'a été prévu au contrat d'achat/vente des actions du capital-actions d'Opco à l'égard du montant d'impôt additionnel découlant d'une nouvelle cotisation pour une année d'imposition se terminant avant l'acquisition de contrôle d'Opco par Acheteurco, le montant d'impôt additionnel payé par Opco, en général, réduirait le revenu protégé en main attribuable aux actions détenues par Acheteurco aux fins de l'application du paragraphe 55(2) L.I.R. Dans une telle situation, il nous apparaît que le paiement d'impôt additionnel par Opco aurait pour effet de réduire le revenu protégé en main pouvant raisonnablement être considéré comme contribuant au gain sur les actions du capital-actions d'Opco détenues par Acheteurco.

Réponse de l'ARC à la question 18 b)

Dans la situation où le contrat d'achat/vente des actions du capital-actions d'Opco contiendrait une clause d'ajustement du prix des actions payé par Acheteurco en raison d'une nouvelle cotisation subie par Opco, le montant reçu par Acheteurco en raison de la clause d'ajustement de prix, en général, réduirait son coût d'acquisition des actions du capital-actions d'Opco.

Par ailleurs, le montant d'impôt additionnel payé par Opco en raison d'une nouvelle cotisation pour une année d'imposition se terminant avant l'acquisition de contrôle aurait, en général, le même impact sur le revenu protégé en main d'Opco que dans la situation a) précédente.

Réponse de l'ARC à la question 18 c)

Dans la situation où le contrat d'achat/vente des actions du capital-actions d'Opco prévoirait que Vendeurco est responsable du montant de toute nouvelle cotisation pour une année d'imposition antérieure à l'acquisition des actions et dans la mesure où Opco recevrait ou serait réputé avoir reçu de Vendeurco un montant équivalant au montant d'impôt additionnel découlant d'une nouvelle cotisation, on devrait tenir compte également dans le calcul du revenu protégé en main attribuable aux actions du capital-actions d'Opco détenues par Acheteurco, de l'application de l'alinéa 12(1)x) L.I.R. ou du paragraphe 12(2.2) L.I.R. au dédommagement ainsi reçu de Vendeurco.

Marc Séguin
2013-049585

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base

downward adjustment under price adjustment clause reduces shares' ACB

Buyco acquired all the shares of Opco on 15 January 2010 from Sellco. A CRA audit resulted in a 2011 reasessment to increase Opco's income for its 2008 and 2009 years. CRA stated (TaxInterpretations translation):

In the situation where the agreement of purchase and sale contains an adjustment clause to the price for the shares payable by Buyco by reason of a reassessment sustained by Opco, the amount received by Buyco by reason of the price adjustment clause, in general, would reduce the acquisition cost of the shares of Opco.

Summary Under

Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c)

CRA post-closing reassessment of Target's pre-closing income changes its SIOH

Buyco acquired all the shares of Opco on 15 January 2010 from Sellco. A CRA audit resulted in a 2011 reassessment to increase Opco's income for its 2008 and 2009 years. CRA stated (TaxInterpretations translation):

[no price adjustment]

[W]here nothing in particular is provided in the agreement of purchase and sale for the shares of the capital stock of Opco respecting the amount of additional income tax payable by Opco, the amount of additional tax paid by Opco, in general, would reduce the safe income on hand attributable to the shares held by Sellco for the purposes of subsection 55(2). In such a situation, it appears to us that the payment of the additional tax by Opco would have the effect of reducing the safe income on hand that can reasonably be considered to contribute to the gain on the shares of the capital stock of Opco held by Buyco [per the summary, "the gain inherent in the Opco's shares"].

[price adjustment to Buyco]

In the situation where the agreement of purchase and sale contains an adjustment clause to the price for the shares payable by Buyco by reason of a reassessment sustained by Opco, the amount received by Buyco by reason of the price adjustment clause, in general, would reduce the acquisition cost of the shares of Opco.

Furthermore, the amount of the additional tax payable by Opco by reason of the reassessment for a taxation year ending prior to the acquisition of control would, in general, have the same effect on Opco’s safe income on hand as ... above.

[price adjustment to Opco]

In the situation where the agreement of purchase and sale for the shares of the capital stock of Opco provides that Sellco is responsible for the amount of any reassessment for a taxation year prior to the acquisition of the shares and to the extent that Opco received or is considered to have received from Sellco an amount equivalent to the amount of additional tax arising under the reassessment, the calculation of the safe income on hand attributable to the Opco shares held by Buyco would need to take into account the application of paragraph 12(1)(x) or subsection 12(2.2) to the compensation received from Sellco.

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11 October 2013 APFF Roundtable Q. 18, 2013-0495851C6 F - Safe income adjustments

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