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: Is the CRA of the view that the same conclusion as that stated in Example 17 of the Safe Income Paper applies in circumstances where the spin-out is not within the ambit of paragraph 55(3)(a)?
Position: Yes.
Reasons: See below.
2025 STEP CRA Roundtable – June 17, 2025
QUESTION 12. CRA Update on Subsection 55(2) and Safe Income – Where Are We Now?
According to the Canada Revenue Agency (“CRA”) paper “CRA Update on Subsection 55(2) and Safe Income – Where Are We Now?” (footnote 1) (the “Safe Income Paper”) presented at the 2023 CTF CRA Roundtable, when a corporation transfers assets as part of a reorganization (a “spin-out”) covered by paragraph 55(3)(a), safe income of the transferor corporation should be allocated to the transferee corporation pursuant to a proration based on the net cost amount of underlying assets transferred.
In Example 17 of the Safe Income Paper, the CRA provided an example where the entire direct safe income (“DSI”) of a transferor corporation (“Opco”) was to be allocated to a transferee corporation (“Newco”) as a result of a spin-out. Specifically, Opco, a subsidiary wholly-owned corporation of Holdco, had DSI of $1,000 and two assets (Asset 1 with an adjusted cost base (“ACB”) of nil and a fair market value (“FMV”) of $1,000, and Asset 2 with an ACB of $1,000 and a FMV of $1,000). The DSI of Opco was reflected in the ACB of Asset 2.
Opco undertook a spin-out covered by paragraph 55(3)(a) to transfer Asset 2 to Newco, a corporation wholly-owned by Holdco. As part of the spin-out, Holdco transferred shares of Opco with an ACB of nil and a FMV of $1,000 to Newco in consideration for shares of Newco with an ACB and paid-up capital (“PUC”) of nil and a FMV of $1,000. Opco then transferred Asset 2 to Newco in consideration for shares of Newco with an ACB, PUC and FMV of $1,000. The shares held by Newco in Opco and by Opco in Newco were redeemed for notes and the notes were cross-cancelled. We understand that, as a result of the redemption of the shares of Opco held by Newco, Newco was deemed to have received a taxable dividend of $1,000 (the “Deemed Dividend”). Finally, the CRA concluded that the entire $1,000 DSI of Opco was transferred to the shares of Newco held by Holdco.
Under the same facts as described in Example 17, if this spin-out is not within the ambit of paragraph 55(3)(a) because the shares of Opco are subsequently sold to an unrelated person as part of a series of transactions that includes the Deemed Dividend, can the CRA confirm that the entire $1,000 DSI of Opco still shifts to the shares of Newco held by Holdco?
Furthermore, does the CRA agree that the Deemed Dividend would be fully sheltered by the $1,000 DSI of Opco such that subsection 55(2) would not apply (even if the shares of Opco so redeemed only accounted for 50% of the FMV of all of the issued shares of Opco)?
CRA Response
For the same reasons as those stated in Example 17 of the Safe Income Paper, it is the CRA’s view that the entire $1,000 DSI of Opco would shift to the shares of Newco held by Holdco as a result of the spin-out of Asset 2 to Newco even if the spin-out ultimately failed to meet the conditions for the exemption provided by paragraph 55(3)(a).
Immediately after the spin-out of Asset 2 to Newco, Holdco holds the shares in Opco with an ACB of $0 and a FMV of $1,000 and Opco owns Asset 1 with an ACB of $0 and a FMV of $1,000. Holdco also holds the shares of Newco with an ACB of $0 and a FMV of $1,000 and Newco owns Asset 2 with an ACB and FMV of $1,000. Since the $1,000 DSI of Opco is reflected in the ACB of Asset 2, it is reasonable to conclude that, after the spin-out, the $1,000 DSI of Opco contributes to the gain on the shares of Newco held by Holdco and does not contribute to any gain on the shares of Opco retained by Holdco. It would therefore not be appropriate to conclude that the $1,000 DSI of Opco or a portion thereof remains with the shares of Opco held by Holdco following the spin-out. The same result and conclusions would apply if a subsequent sale of the shares of Opco occurs within the series of transactions (as here) or if the shares of Opco remain within the related corporate group (as in Example 17 of the Safe Income Paper).
Based on the foregoing, it would also follow that, immediately prior to the redemption of the shares of Opco held by Newco, the $1,000 DSI of Opco would reasonably be viewed as contributing to the accrued gain on the shares so redeemed such that subsection 55(2) should not apply to the Deemed Dividend.
Laurence Gagné
2025-105156
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1. Ton-That, M. “CRA Update on Subsection 55(2) and Safe Income «Where Are We Now?»”, 75th Annual Tax Conference, 2023.
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