2025 Ruling 2023-0990951R3 - Safe Income Determination Time Monthly Dividends

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: What is the safe income determination time with respect to the monthly repatriation of interest and whether there would be one safe income determination time or a monthly safe income determination time.

Position: The safe-income determination time should be immediately before each of the Targeted Dividends.

Reasons: Definition of series of transactions, as broadened by 248(10), applied to the specific facts, in the context of 55(2).

XXXXXXXXXX									2023-099095

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, seeking an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the information provided in subsequent correspondence.

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions or issues involved in this ruling are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the Taxpayers or a related person and:

A. being considered by the CRA in connection with any such tax return;

B. under objection by the Taxpayers or a related person; or

C. the subject of a current or completed court process involving the Taxpayers or a related person; or

the subject of a ruling request previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.The tax account numbers, addresses, Tax Services Office and the Tax Center of the Taxpayers are as follows:

XXXXXXXXXX

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions, and any references thereto are provided solely for the convenience of the reader.

Definitions

Unless otherwise stated:

i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended, (the “Act”);

ii. all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“XXXXXXXXXX” means XXXXXXXXXX, a limited partnership formed under the XXXXXXXXXX;

XXXXXXXXXX;

“Canco 1” means XXXXXXXXXX;

“Canco 2” means XXXXXXXXXX. incorporated under the XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Dividend payor” means a corporation mentioned at subsections 112(1), 112(2) or 138(6) from which a Dividend recipient has received a taxable dividend described in paragraph 55(2.1)(a);

“Dividend recipient” has the meaning assigned by subsection 55(2.1);

“Loan 1” is the indebtedness owing by Partner A to Partner B, as evidenced by Note 1;

“Loan 2” is the indebtedness owing by Canco 1 to XXXXXXXXXX, as evidenced by Note 2;

“Note 1” means the promissory note described at Paragraph 14;

“Note 2” means the promissory note described at Paragraph 12;

“Paragraph” refers to a numbered paragraph in this letter;

“Partner A” means XXXXXXXXXX, incorporated under the XXXXXXXXXX;

“Partner B” means XXXXXXXXXX, incorporated under the XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 17 to 21;

“Pubco” means XXXXXXXXXX incorporated under the laws of the XXXXXXXXXX, XXXXXXXXXX;

“PUC” means “paid-up capital” and has the meaning assigned by subsection 89(1);

“Safe income” means, with respect to a taxable dividend described in paragraph 55(2.1)(a) that is received by a Dividend recipient from a Dividend payor, the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received;

“Safe-income determination time” has the meaning assigned by subsection 55(1); and

“XXXXXXXXXXco” means XXXXXXXXXX incorporated under the laws of the XXXXXXXXXX.

Facts

A complete description of all the relevant facts is as follows:

1. Pubco is the sole shareholder of XXXXXXXXXXco.

2. XXXXXXXXXXco is the sole shareholder of Partner A.

3. Partner A is the sole shareholder of Partner B.

4. Partner B is the sole general partner of XXXXXXXXXX. Partner A is the sole limited partner of XXXXXXXXXX.

5. Partner A has a XXXXXXXXXX% partnership interest in XXXXXXXXXX. Partner B has a XXXXXXXXXX% partnership interest in XXXXXXXXXX.

6. XXXXXXXXXXco is the sole shareholder of Canco 2.

7. Canco 2 is the sole shareholder of Canco 1.

8. Each of Partner A, Partner B, Canco 1 and Canco 2 is resident in Canada for purposes of the Act and a taxable Canadian corporation as defined in subsection 89(1).

9. Partner A, Partner B, Canco 1 and Canco 2 are not public corporations for the purposes of the Act.

10. The taxation year end for each of Partner A, Partner B, Canco 1, Canco 2, XXXXXXXXXXco and Pubco is XXXXXXXXXX.

11. XXXXXXXXXX has a fiscal period that ends on XXXXXXXXXX.

12. Note 2 is a promissory note in the principal amount of $XXXXXXXXXX with interest payable at a fixed rate of XXXXXXXXXX% per annum owing by Canco 1 to XXXXXXXXXX. Note 2 provides that interest is payable on Loan 2 by Canco 1 to XXXXXXXXXX on an annual basis. Pursuant to Note 2, Canco 1 shall be entitled, at any time and from time to time, without the consent of XXXXXXXXXX and without paying any penalty or premium, to prepay all or any portion of Loan 2 and any accrued interest.

13. In XXXXXXXXXX, Canco 1 provided notice to XXXXXXXXXX that it intends to prepay the accrued interest due under Loan 2 on a monthly basis.

14. Note 1 is a promissory note in the principal amount of $XXXXXXXXXX with interest payable at a fixed rate of XXXXXXXXXX% per annum owing by Partner A to Partner B. Note 1 provides that interest is payable on Loan 1 on the last business day of each month. Pursuant to Note 1, Partner A shall be entitled, at any time and from time to time, without the consent of Partner B and without paying any penalty or premium, to prepay all or any portion of Loan 1 and any accrued interest.

15. Since Canco 1 has provided notice to XXXXXXXXXX, as described in Paragraph 13:

(a) Canco 1 has paid interest to XXXXXXXXXX on Loan 2 on a monthly basis;

(b) XXXXXXXXXX has distributed the corresponding interest received to Partner A on a monthly basis;

(c) Partner A has paid to Partner B interest that accrued on Loan 1 on a monthly basis;

(d) Partner B has kept a reserve for income tax and for administrative expenses and the balance of the interest payment received from Partner A was distributed as a monthly return of PUC on the shares of its capital stock owned by Partner A; and

(e) The corresponding amount received from Partner B was distributed by Partner A as a monthly return of PUC on the shares of its capital stock owned by XXXXXXXXXXco.

16. During the XXXXXXXXXX period, the following amounts were paid as returns of PUC from Partner B to Partner A (the “XXXXXXXXXX Returns”), as described in Paragraph 15(d):

		Period of payment(XXXXXXXXXX)		Amount of XXXXXXXXXX Returns(CAD)
				P1					XXXXXXXXXX
				P2					XXXXXXXXXX
				P3					XXXXXXXXXX
				P4					XXXXXXXXXX
				P5					XXXXXXXXXX
				P6					XXXXXXXXXX
				P7					XXXXXXXXXX
				P8					XXXXXXXXXX
				P9					XXXXXXXXXX
				P10					XXXXXXXXXX
				P11					XXXXXXXXXX
				P12					XXXXXXXXXX

17. Partner B will establish a dividend policy. Pursuant to the dividend policy of Partner B, Partner B will declare dividends in the ordinary course, payable to Partner A each month following receipt of the interest income from Partner A, such dividends to be equal to the interest income received, less a reserve for income tax payable on such interest income and less an amount in respect of Partner B’s general and administrative expenses.

18. Each month after the issuance of this ruling, following receipt by Partner A of its partnership distribution from XXXXXXXXXX and upon receipt of the interest payment from Partner A on Loan 1, Partner B will declare and pay a dividend on its issued and outstanding common shares held by Partner A. The amount of the dividend declared and paid by Partner B will be determined pursuant to the dividend policy described in Paragraph 17.

Included in these dividends will be the twelve monthly dividends that will be paid after the issuance of this decision letter, the amounts of which should be similar to the XXXXXXXXXX Returns (each of these twelve monthly dividends referred to herein as a “Targeted Dividend”).

Partner A will include the dividends received from Partner B in its income. Partner A will claim a deduction in respect of the dividend received pursuant to subsection 112(1). No Part IV tax will be payable on the dividends declared and paid by Partner B.

The amount of each such dividend will not exceed the Safe income, determined immediately before the Safe-income determination time for the dividend, that is attributable to the common shares of the capital stock of Partner B.

19. Each month, upon receipt of a dividend from Partner B as described in Paragraph 18, XXXXXXXXXXco, as the sole shareholder of Partner A, will resolve by special resolution to increase the stated capital of the common shares of the capital stock of Partner A in an amount equal to the amount of the dividend received from Partner B (the retained earnings of Partner A will be decreased by the amount of the increase in the stated capital). Pursuant to subsection 84(1), Partner A will be deemed to pay, and XXXXXXXXXXco will be deemed to receive, a dividend equal to the increase in the PUC of the common shares of the capital stock of Partner A.

The dividends deemed to be received by XXXXXXXXXXco will be subject to a withholding tax pursuant to Subsection 212(2).

20. Partner A will remit to the Receiver General the amount of the withholding tax payable on the deemed dividend described in Paragraph 19.

21. Each month, following the increase to the stated capital of the common shares of the capital stock of Partner A as described in Paragraph 19, XXXXXXXXXXco, as the sole shareholder of Partner A, will resolve by special resolution to reduce the stated capital of the common shares of the capital stock of Partner A in an amount equal to the increase in stated capital as described in Paragraph 19, and Partner A shall distribute such amount, less the amount of the withholding tax described in Paragraph 20, to XXXXXXXXXXco as a return of capital.

Additional information

22. The shares of the capital stock of Partner A, Partner B, Canco 1 and Canco 2 are not taxable Canadian property for purposes of the Act.

23. Partner A’s only sources of income are partnership income allocated to it by XXXXXXXXXX and dividends received by it from Partner B. Accordingly, Partner A is expected to have taxable income for its taxation year equal to the difference between the partnership income allocated to it by XXXXXXXXXX and the amount of interest it pays to Partner B in respect of Loan 1. Partner A is not expected to have any expenses for any cross-border interest paid or payable to any intra-group entity.

24. Partner B has no income other than the interest income in respect of Loan 1 and any amounts allocated to it by XXXXXXXXXX. Partner B is not expected to have any expenses for any cross-border interest paid or payable to any intra-group entity.

Purposes of the Proposed Transactions

25. The purpose of the proposed monthly dividends to be declared by Partner B is to repatriate the interest income paid by Canco 1 on Loan 2 to XXXXXXXXXXco. None of the purposes of the dividends include the reduction of the capital gain that would be realized on a disposition of any share, the reduction in the fair market value of a share, or an increase in the cost of property, as contemplated by paragraph 55(2.1)(b).

26. The acceleration of the interest payable on Loan 2 and the corresponding monthly payments of dividends from Partner B to Partner A are exclusively motivated by commercial reasons of XXXXXXXXXXco, namely a commercial preference to repatriate amounts through small distributions, rather than large ones.

Ruling

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:

Provided that none of the dispositions or increases in interest described in any of subparagraphs 55(3)(a)(i) to (v) has occurred or will occur as part of the same series of transactions or events as a Targeted Dividend and that no other dividend (other than those described in this ruling) has been paid or will be paid as part of the same series of transactions or events as a Targeted Dividend, the Safe-income determination time, in respect of each Targeted Dividend, will be the time immediately before each monthly dividend is paid, and not immediately before the payment of the first Targeted Dividend.

This ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and is binding on the CRA, provided that the Proposed Transactions described in Paragraphs 17 to 21 are completed no later than twelve (12) months after the date of this letter.

The above ruling is based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and its regulations, which if enacted, could have an effect on the ruling provided herein.

Comments

Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a. the characterization of any property described herein to the holder thereof;

b. the stated capital or PUC in respect of any share referred to herein;

c. the amount of Safe income of any corporation, for a dividend that is paid as part of the Proposed Transactions;

d. any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the Facts, Proposed Transactions, or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the Ruling, including without limitation:

(i) whether the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter;

(ii) whether Part IV tax will be applicable or not to any dividend received;

(iii) the deductibility of any payment of interest or the reasonableness of any rate of interest;

(iv) whether one of the purposes of the payment or receipt of a dividend was described in sub-paragraphs 55(2.1)(b)(i) or (ii);

(v) whether the applicable taxes under Part XIII were or will be withheld and remitted to the CRA;

(vi) the existence of a series of transactions for any other purposes of the Act;

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

Yours truly,

XXXXXXXXXX
for the Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch