2015 Ruling 2015-0589471R3 - Earnout

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.

Principal Issues: (1) Does the employee deal at arm's length with the vendor? (2) Does the administrative treatment in respect of earnout proceeds, described in IT-426R, apply in respect of the sale of shares by the vendor corporation to the key employee? (3) Are dividends subject to subsection 55(2)?

Position: (1) Yes, in these circumstances. (2) Yes, in these circumstances. (3) Yes, to some of the dividends.

Reasons: (1) Based on the law as applied to these facts. (2) The facts satisfy the criteria set out in paragraph 2 of IT-426R. (3) Certain dividends will be considered to reduce a capital gain and the reduction will not be attributable to safe income.

XXXXXXXXXX							2015-058947

XXXXXXXXXX, 2015

Dear Sir:

Re: XXXXXXXXXX (the “Applicants”)
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, and as further revised, seeking an advance income tax ruling on behalf of the Applicants. We also acknowledge the additional information provided in our subsequent communications.

This letter is based solely on the Facts, Proposed Transactions, Purposes of the Proposed Transactions and Additional Information described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions and Additional Information and any references thereto are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of the Applicants none of the issues involved in this advance income tax ruling:

(a) is in an earlier return of an Applicant or person related to an Applicant;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of an Applicant or a person related to an Applicant;

(c) is under objection by an Applicant or a person related to an Applicant;

(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate of the CRA in connection with an Applicant or a person related to an Applicant.

To the best of the knowledge of the Applicants, the Proposed Transactions will not have any impact on the outstanding tax liabilities, if any, of the Applicants.

DEFINITIONS

In this letter, unless otherwise stated, the following terms have the meaning specified below (and words importing the singular include the plural and vice versa and words importing any gender or the neuter include all genders and the neuter):

“Act” means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof and, unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause refers to the relevant provision of the Act;

“Additional Information” means the information described in Paragraphs 25 to 27.1;

“adjusted cost base” has the meaning assigned by section 54;

“Applicants” means Holdco and Opco and “Applicant” means either of them;

“arm’s length” has the meaning assigned by section 251;

“BCA” means the Business Corporations Act XXXXXXXXXX;

“business” has the meaning assigned by subsection 248(1);

“Canadian-controlled private corporation” or “CCPC” has the meaning assigned by subsection 248(1) with reference to subsection 125(7);

“capital dividend account” has the meaning assigned by subsection 89(1);

“capital gain” has the meaning assigned by section 39;

“capital property” has the meaning assigned by section 54;

“common share” has the meaning assigned by subsection 248(1);

“Consolidated Income” means the consolidated income of Holdco and the Subsidiaries described in Paragraph 20;

“Subco1” means XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“disposition” has the meaning assigned by subsection 248(1);

“Dividend Policy” has the meaning described in Paragraph 12;

“Earnout Tracking Dividends” means dividends payable on the Opco Preferred shares that are described in Paragraph 18(b);

“eligible dividend” has the meaning assigned by subsection 89(1);

“employee” has the meaning assigned by subsection 248(1) to “employee” and in the definition of “employment” in that subsection;

“employment” has the meaning assigned by subsection 248(1);

“excessive eligible dividend designation” has the meaning assigned by subsection 89(1);

“Facts” means the factual information described in Paragraphs 1 through 16;

“First Annual Dividends” has the meaning described in Paragraph 12.1;

“FMV” means fair market value and is the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

“GAAR” means the general anti-avoidance rule in section 245;

“Holdco” means XXXXXXXXXX;

“Holdco Common shares” means common shares of Holdco;

“Interim Income Dividends” has the meaning described in Paragraph 17;

“Key Employee” means XXXXXXXXXX, an individual residing in XXXXXXXXXX, Canada;

“Subco2” means XXXXXXXXXX;

“officer” has the meaning assigned in the definition of “office” in subsection 248(1);

“Opco” means XXXXXXXXXX;

“Opco Preferred shares” means preferred shares of Opco described in Paragraph 18;

“Paragraph” means a numbered paragraph in this document;

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means those proposed transactions and events described in Paragraphs 17 through 24;

“Province” means the Province of XXXXXXXXXX;

“Purchase Agreement” means the purchase and sale agreement described in Paragraph 20;

“Purchase Price” has the meaning given in Paragraphs 20 and 21;

“Purposes” means the purposes of the Proposed Transactions described in Paragraphs 28 and 29;

“Regulations” means the Income Tax Regulations, C.R.C., c. 945, promulgated under the Act;

“related persons” has the meaning assigned by subsection 251(2);

“safe-income determination time” has the meaning assigned to that phrase by subsection 55(1);

“safe income on hand” in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for a transaction, event or series of transactions or events;

“Second Annual Dividends” has the meaning described in Paragraph 24;

“Shareholders” means the shareholders of Holdco, being XXXXXXXXXX and “Shareholder” means any one of them;

“specified financial institution” has the meaning assigned by subsection 248(1);

“specified person” has the meaning assigned by paragraph 112(2.22)(b);

“stated capital” has the meaning assigned by the BCA;

“Subsidiaries” means Opco, Subco2 and Subco1, and “Subsidiary” means any one of them;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1);

“taxation year” has the meaning assigned by subsection 249(1); and

“Tranches” has the meaning given in Paragraph 20.

FACTS

1. Each of Holdco, the Subsidiaries and the Shareholders:

(a) exists under the BCA;

(b) is a taxable Canadian corporation;

(c) is a Canadian-controlled private corporation; and

(d) is not a specified financial institution or a specified person in relation to such an institution.

2. The taxation year

XXXXXXXXXX

3. Holdco’s activities consist primarily of investing in the Subsidiaries. Holdco also owns certain real property on which a building is being constructed. Holdco anticipates leasing the building to Opco for use in Opco’s business when the building becomes available for use.

4. Opco carries on a XXXXXXXXXX business in the Province.

5. Subco2 owns XXXXXXXXXX to enable Opco to carry on its business.

6. Subco1 carries on a XXXXXXXXXX business, primarily in the Province.

7. Holdco legally and beneficially owns all of the outstanding shares of both Opco and Subco2 and it beneficially owns XXXXXXXXXX of the outstanding shares of Subco1.

8. Holdco, Opco and Subco2 commenced carrying on their activities in XXXXXXXXXX with XXXXXXXXXX individuals employed by Opco. The corporations have experienced very rapid growth since that time. Opco currently has approximately XXXXXXXXXX employees and has had as many as XXXXXXXXXX employees (XXXXXXXXXX). However, the nature of the activities is such that the profitability of the corporations could fluctuate very significantly and they may be exposed to material operational risks, making it difficult to value the underlying goodwill of Holdco and its subsidiaries and, therefore, the shares of Holdco.

9. Key Employee is an officer XXXXXXXXXX of Opco. Holdco and the Shareholders wish to sell to Key Employee, and Key Employee wishes to buy, XXXXXXXXXX% of the outstanding shares of Holdco. Given the highly variable and immature nature of the activities carried on by Holdco and the Subsidiaries, the parties wish to structure the purchase and sale of Holdco shares using an “earnout” method, whereby the purchase price would be paid over approximately XXXXXXXXXX years based upon the profitability of Holdco and the Subsidiaries over that period.

10. Pursuant to section XXXXXXXXXX of the BCA, Holdco is not permitted to issue treasury shares until the consideration for the shares is fully paid. Consequently, Holdco may not issue treasury shares to the Key Employee under the BCA where the subscription price is paid using an earnout method. Therefore, the Shareholders have agreed to sell a portion of their Holdco shares to another party, in this case “Opco”, who will then sell those shares to the Key Employee using an earnout method of payment to achieve the commercial objective.

11. Pursuant to section XXXXXXXXXX of the BCA, Opco may hold shares of Holdco for a maximum of XXXXXXXXXX days, notwithstanding that Opco is a subsidiary of Holdco for purposes of the BCA.

12. None of Holdco or any of the Subsidiaries has previously paid a dividend. However, each of Holdco and the Subsidiaries has adopted a policy (“Dividend Policy”) whereby Holdco and each of the Subsidiaries have and will continue to record in their respective financial statements, as soon as is practicable following each particular corporation’s year-end and for the purposes set forth in Paragraph 29, dividends to be payable to the particular corporation’s shareholders in amounts up to that corporation’s net after-tax income for the particular taxation year, as determined in accordance with International Financial Reporting Standards (“IFRS”) (including dividends from the Subsidiaries in the case of Holdco). In accordance with the Dividend Policy, such dividends will be paid when determined by the directors of the payor and will be paid to the shareholders of the payor at the time the dividend is paid. The dividends will be designated as eligible dividends when paid to the extent permitted to not result in an excessive eligible dividend designation (unless otherwise determined by the directors).

12.1 Pursuant to the Dividend Policy, each of Holdco and the Subsidiaries recorded a “dividend payable” at the end of its XXXXXXXXXX taxation year with the amount of $XXXXXXXXXX having been recorded as a dividend payable and appearing as a liability in the consolidated financial statements of Holdco and the Subsidiaries as at that date (the “First Annual Dividends”). The payment of the dividends is described in Paragraph 17.

13. The only outstanding shares of Holdco are the Holdco Common shares which are owned by the Shareholders equally such that each Shareholder owns XXXXXXXXXX% of the issued Holdco Common shares. The adjusted cost base of the Holdco Common shares owned by each of the Shareholders is $XXXXXXXXXX.

14. Each of the Shareholders deals at arm’s length with the Key Employee. None of the Shareholders is related to Holdco, the Subsidiaries or to any of the other Shareholders.

15. Holdco and the Subsidiaries deal at arm’s length with the Key Employee.

16. None of the Shareholders or Opco is in the business of buying and selling shares, and all shares described in the Proposed Transactions are held as capital property for the purposes of the Act.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated.

17. The directors of the Subsidiaries and Holdco will resolve for the Subsidiaries and Holdco to pay, to the persons who are their respective shareholders at the time of this step, together with the First Annual Dividends (no portion of which will have been paid prior to that time), dividends that approximate but do not exceed a payor corporation’s cumulative income that is earned or realized for purposes of the Act up to such time minus income taxes that are paid or payable in respect of such income plus, in the case of Holdco, such dividends received from the Subsidiaries (the dividends described in this Paragraph, other than the First Annual Dividends, being called the “Interim Income Dividends”). The First Annual Dividends and Interim Income Dividends shall be paid at the time of these declarations, or as soon as practicable thereafter, concurrently by the Subsidiaries and, immediately thereafter, concurrently by Holdco and each such dividend will be designated as an eligible dividend when paid to the extent permitted to not result in an excessive eligible dividend designation.

18. Opco will amend its articles to authorize, inter alia, the Opco Preferred shares having the following attributes:

(a) the Opco Preferred shares will be non-voting;

(b) the Opco Preferred shares will have a right to cumulative dividends in an aggregate amount equal to the Purchase Price less any applicable taxes payable by Opco in respect of the sale of Holdco Common shares to the Key Employee, payable from time to time as soon as practicable after any portion of the Purchase Price is received by Opco and such taxes are determined;

(c) the Opco Preferred shares will not be redeemable until after the aforementioned dividends have been paid, following which time the Opco Preferred shares will be redeemable and retractable for $XXXXXXXXXX in aggregate; and

(d) no shares of the class of Opco Preferred shares may be issued more than once.

19. The Shareholders will transfer, in aggregate amongst them, XXXXXXXXXX% of the outstanding Holdco Common shares to Opco in exchange for a corresponding number of Opco Preferred shares having a FMV approximately equal to, and not greater than, the FMV of the transferred Holdco Common shares. Each Shareholder and Opco will jointly elect under subsection 85(1), in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the transfer, with an agreed amount equal to such Shareholder’s adjusted cost base of the Holdco Common shares transferred. The agreed amount will be added to the stated capital of the Opco Preferred shares.

20. Within XXXXXXXXXX days of the immediately preceding Proposed Transaction, pursuant to a written agreement (“Purchase Agreement”) Opco will sell XXXXXXXXXX% of the outstanding Holdco Common shares to the Key Employee in exchange for cash consideration (“Purchase Price”) payable in five tranches (“Tranches”) as follows:

(a) XXXXXXXXXX% of consolidated net after-tax income of Holdco and the Subsidiaries determined in accordance with IFRS, subject to certain adjustments including for share issuances or consolidations and to add back an amount for taxes arising in connection with the sale of the Holdco Common shares under the Purchase Agreement (“Consolidated Income”) for the first taxation year ending after the Holdco Common shares are sold plus XXXXXXXXXX% of the shareholder equity as of the time of sale and XXXXXXXXXX% of any dividends receivable as of the time of sale determined in accordance with IFRS, payable as soon as practicable after such Consolidated Income, equity and receivables are determined; provided that if the disposition of the Holdco Common shares does not occur at the commencement of a taxation year of Holdco, the first Tranche of the Purchase Price shall be reduced by the portion of Consolidated Income for the year that was earned prior to the disposition;

(b) XXXXXXXXXX% of Consolidated Income for the second taxation year ending after the Holdco Common shares are sold, payable as soon as practicable after such Consolidated Income is determined;

(c) XXXXXXXXXX% of Consolidated Income for the third taxation year ending after the Holdco Common shares are sold, payable as soon as practicable after such Consolidated Income is determined;

(d) XXXXXXXXXX% of Consolidated Income for the fourth taxation year ending after the Holdco Common shares are sold, payable as soon as practicable after such Consolidated Income is determined; and

(e) XXXXXXXXXX% of Consolidated Income for the fifth taxation year ending after the Holdco Common shares are sold, payable as soon as practicable after such Consolidated Income is determined, and in any event no later than XXXXXXXXXX years after the end of the taxation year of Holdco in which the Holdco Common shares are sold.

The parties have structured the payment for the Holdco Common shares in this manner (i.e. as an earnout) because they will be unable to determine the value of the goodwill of Holdco and the Subsidiaries at the date of the sale.

21. If any person (“Acquiror”) acquires all of the Holdco Common shares or all or substantially all of the assets of Holdco and the Subsidiaries or if Holdco Common shares become listed on any public stock exchange on an initial public offering prior to the payment of all of the Tranches of the Purchase Price as described above, the Purchase Price shall be adjusted. In particular, for each Tranche that has not been paid as contemplated above, the Purchase Price payable for each such Tranche shall be paid on or about the time of the particular event and shall be increased or decreased to be equal to such amount as:

(a) in the case of a sale of the shares of Holdco, is equal to the purchase price paid by the Acquiror for XXXXXXXXXX% of the Holdco Common shares;

(b) in the case of an acquisition of all or substantially all the assets of Holdco and the Subsidiaries, is equal to the amount that would be received by a holder of XXXXXXXXXX% of the Holdco Common shares if net cash (i.e., after repayment of all liabilities) received from the Acquiror for the assets acquired from Holdco and the Subsidiaries (plus cash equal to the FMV of any assets not sold to the Acquiror) were to be distributed to their respective shareholders on a winding-up of those corporations; and

(c) in the case of an initial public offering, is equal to the initial public offering price per share multiplied by the number of Holdco Common shares that represent XXXXXXXXXX% of the Holdco Common shares.

22. As soon as practicable after any portion of the Purchase Price is determined (e.g., when Consolidated Income for a taxation year is determined), the Key Employee will pay the required portion of the Purchase Price to Opco.

23. As soon as practicable after any portion of the Purchase Price is paid to Opco and applicable taxes in respect thereof are determined, Opco will pay Earnout Tracking Dividends to the Shareholders in accordance with the terms of the Opco Preferred shares.

24. Although payment of the First Annual Dividends are, largely as a result of the making of the request for this advance income tax ruling letter, delayed to the date of payment set out in Paragraph 17 (to be paid together with the Interim Income Dividends), as soon as practicable after each of their respective annual year-ends the Subsidiaries and Holdco will declare and pay dividends to their respective common shareholders in accordance with the Dividend Policy. The next such dividends will be declared and paid as soon as practicable after the XXXXXXXXXX year-end of the Subsidiaries and Holdco (the “Second Annual Dividends”). All such dividends will be designated as eligible dividends when paid to the extent permitted to not result in an excessive eligible dividend designation. The dividends that are paid will not exceed a payor corporation’s cumulative income that is earned or realized for purposes of the Act up to the particular year-end minus income taxes that are paid or payable in respect of such income, minus previous or concurrent taxable dividends paid and plus, in the case of Holdco, dividends received from the Subsidiaries.

ADDITIONAL INFORMATION

25. Other than as described herein, no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) occurred or will occur and no dividends were paid or will be paid as part of a series of transactions or events that includes any of the dividends paid as part of the Proposed Transactions. From time to time one or more of the Shareholders may pay dividends to their respective individual shareholders and it is possible that an arrangement similar to the Proposed Transactions will be reached with one or more other persons, or additional arrangements similar to the Proposed Transactions will be reached with the Key Employee but none of those transactions or events will be part of a series of transactions or events that includes any of the dividends paid as part of the Proposed Transactions.

26. The Dividend Policy was considered and adopted by Holdco and the Subsidiaries separate and apart from any negotiations with the Key Employee for the sale to him of the Holdco Common shares described in Paragraph 20. Holdco and the Subsidiaries would have adopted and undertaken the Dividend Policy regardless of whether or not the Proposed Transactions, other than those comprising the Dividend Policy, would be implemented.

27. The Key Employee was prepared to acquire the Holdco Common shares referred to in Paragraph 20 in accordance with the terms of the Purchase Agreement regardless of whether the Dividend Policy was implemented, provided he would have been able to obtain financing assistance that would be expected to be necessary to enable him to satisfy payment of the Purchase Price at the required times. The Key Employee is not aware of any reason that such financing assistance could not be obtained.

27.1 A copy of the Purchase Agreement referred to in Paragraph 20 will be sent to the CRA for the taxation year in which the shares were disposed of, along with the request that Opco intends to follow the application of the cost recovery method to the sale, and an undertaking to follow the procedure of reporting the gain or loss on the sale under the cost recovery method as described in Interpretation Bulletin IT-426R, “Shares Sold Subject to an Earnout Agreement”.

PURPOSES OF THE PROPOSED TRANSACTIONS

The overall purposes of the Proposed Transactions are set forth below.

28. The Proposed Transactions are being implemented to allow the Key Employee to acquire Holdco Common shares for a purchase price that is based upon the earnings of Holdco and the Subsidiaries following the purchase (i.e. using an earnout method) and in accordance with applicable corporate law. In particular, it is not possible for Holdco to simply issue treasury shares to the Key Employee under an earnout method due to corporate law constraints. Moreover, since (i) each of the Shareholders may deal at arm’s length with Holdco, (ii) the FMV of the Holdco Common shares is difficult to determine, and (iii) the Key Employee is an employee of Opco, a sale of Holdco Common shares by the Shareholders to the Key Employee may not be described in section 7, such that the tax consequences of such a sale to both the Shareholders and the Key Employee could be uncertain. It is intended that the provisions of section 7 apply to the Proposed Transactions in order to provide more certainty to the parties regarding the income tax consequences associated with the purchase of the Holdco Common shares by the Key Employee.

29. The purpose of the dividends provided for in the Dividend Policy, including the First Annual Dividends and the Second Annual Dividends, is to ensure that the capital invested in Holdco and the Subsidiaries in the form of equity (accumulated earnings on hand in the corporations that has been added to shareholders’ equity) is minimized at all times. The proceeds of the dividends may be loaned back to the payor (to the extent the payor requires funds) and, in that event, are intended to be secured by the creditor.

RULINGS

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Provided that the Shareholders and Opco file the requisite joint elections in the prescribed form and manner and within the time limits specified in subsection 85(6), subject to the application of subsection 69(11), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the disposition of Holdco Common shares by the Shareholders to Opco, as described in Paragraph 19.

B. Paragraph 12(1)(g) will not apply to the disposition of Holdco Common shares by Opco to the Key Employee described in Paragraph 20.

C. Opco will be required to reduce the adjusted cost base to it of the Holdco Common shares disposed of in Paragraph 20 as amounts on account of the Purchase Price become determinable. Once such an amount exceeds the adjusted cost base to Opco of the Holdco Common shares (as reduced by any previous such amounts), pursuant to subsection 40(1) the excess will be considered a capital gain that is realized by Opco at the time the particular amount becomes determinable. For these purposes, an amount becomes determinable once it is capable of being calculated with certainty.

D. The provisions of subsection 55(2) will not apply to Holdco or to a Shareholder, that receives a taxable dividend paid by a Subsidiary or Holdco, that is included in the First Annual Dividends, the Interim Income Dividends or the Second Annual Dividends, provided that the full amount of each such dividend does not exceed the safe income on hand immediately before the safe income determination time that is attributable to the shares of the particular corporation on which the dividend is paid. For greater certainty, provided the Facts, Proposed Transactions, Additional Information and Purposes describe all relevant transactions, events or series of transactions or events that include any dividend that is paid in Paragraphs 17 and 24, the safe-income determination time in respect of each of the dividends included in the Second Annual Dividends will be the time that is immediately before the time the first of those dividends are paid and the safe income determination time in respect of all of the First Annual Dividends and the Interim Income Dividends will not be later than the time that is immediately before the time the first of such dividends is paid.

E. The provisions of subsection 55(2) will apply to an Earnout Tracking Dividend that is received by a corporation resident in Canada. For greater certainty, the safe income determination time for the Earnout Tracking Dividends will be at the time that is immediately before the time the first of the Interim Income Dividends is paid.

F. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine any of the tax consequences confirmed in the rulings given herein.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014, and are binding on the CRA, provided that the Proposed Transactions are completed not later than XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

1. Although we received, for review, certain documents relating to the proposed transactions, our rulings are based solely on the representations contained in the Facts and Proposed Transactions herein.

2. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly

a) the determination of the amount of the PUC of any share, the cost amount, ACB or FMV of any property referred to herein or the amount of any other tax account of any corporation referred to herein;

b) the amount of safe income on hand of any corporation for any dividend that is paid as part of the series of transactions or events that includes the Proposed Transactions; or

c) any other tax consequences relating to the Definitions, Facts, Proposed Transactions and Additional Information described herein, other than those described in the rulings given above, including whether any subsequent transaction or event is or is not considered to be part of a series of transactions or events described herein.

OPINIONS

On July 31, 2015, legislative proposals relating to the Act and Regulations were issued by the Department of Finance. Under the proposed legislation, there are changes proposed to subsection 55(2) and the addition of subsection 55(2.1).

If legislation is enacted substantially in the form proposed, ruling D would be changed considering a new definition of “safe income on hand” that could read as follows:

“safe income on hand” in respect of a particular share of a corporation at a particular time means the income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation (after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the receipt of a particular dividend) that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the share on which the dividend is received;

Ruling D would read as follows:

“The provisions of subsection 55(2) will not apply to Holdco or to a shareholder that receives a taxable dividend paid by a Subsidiary or Holdco that is included in the First Annual Dividends, the Interim Income Dividends or the Second Annual Dividends, provided that the full amount of each such dividend does not exceed the amount of safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the shares of the corporation on which the dividend was received at the safe income determination time for the transaction, event or series of transactions that includes the receipt of the dividend. For greater certainty, provided the Facts, Proposed Transactions, Additional Information and Purposes describe all relevant transactions, events or series of transactions or events that include any dividend described in Paragraphs 17 and 24, the safe-income determination time in respect of each of the dividends included in the Second Annual Dividends will be the time that is immediately before the time the first of those dividends are paid and the safe income determination time in respect of all of the First Annual Dividends and the Interim Income Dividends will not be later than the time that is immediately before the time the first of such dividends is paid.”

No change would be required to ruling E.

The foregoing opinions are not rulings, and, in accordance with the practice referred to in Information Circular 70-6R6, are not binding on the CRA.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch