18 November 1987 Income Tax Severed Letter 5-3828 - [Subsection 55(2) of the ITA]

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.

XXXX

November 18, 1987

Dear Sirs:

Re: Subsection 55(2) of the Income Tax Act (the "Act")

In your letter of September 1, 1987 you requested our opinion concerning the calculation of "safe income". "Safe income" refers to the "... income earned or realized after 1971 ..." as that term is used in subsection 55(2) of the Act.

You described an example in which brothers A and B each own 50% of the issued share capital of each of two corporations, A Co. and B Co. The two corporations are involved in businesses the transactions of which are closely related. You asked for our view on the calculation of safe income if brother A surrenders all of his shares in each of A Co. and B Co. for cancellation, at a time when the aggregate safe income of A Co. is $300,000 and the aggregate safe income of B Co. is a negative amount of $100,000. In particular, you asked whether the safe income of each corporation would be treated separately, or whether the amounts would be combined and treated as $200,000.

Binding assurance with respect to the tax consequences of specific proposed transactions can only be provided in response to a request for an advance income tax ruling, as explained in Information Circular 70-6R, published by Revenue Canada, Taxation on December 18, 1978. Although we cannot provide such binding assurance in response to your request, we have provided below our general opinion on the issues you have raised. The provisions of opinions is explained and distinguished from the granting of rulings in paragraph 24 of Information Circular 70-6R.

Safe income at a particular time with respect to a share of a corporation held by a particular shareholder is the portion of the income earned or realized by any corporation after 1971 and before that time that could reasonably be considered to attribute to the capital gain that would be realized on a disposition at fair market value of the share at that time.

It is important to note that it is possible that a computation of safe income could result in an amount which is greater than that which could be paid as a safe dividend. Subsection 55(2) of the Act discourages the payment of any dividend which would result in a significant reduction in the portion of the capital gain attributable to anything other than income earned or realized by any corporation after 1971. Therefore, it is necessary to determine the portion of the gain which reflects the income earned or realized during the holding period and the portion of the gain which is attributable to anything else such as goodwill or unrealized appreciation in assets. If the amount of safe income computed is greater than the gain attributable to safe income, the payment of a dividend to the full extent of safe income will reduce the gain attributable to something else, and subsection 55(2) of the Act may apply to the dividend.

We have interpreted the facts of your example to mean that the aggregate safe income of all of the issued shares of A Co. during the period such shares have been held by both brother A and brother B is $300,000, and the aggregate safe income of all of the issued shares of B Co. during the period such shares have been held by brother A and brother B is a negative amount of $100,000. Provided this understanding of your example is correct, it is our opinion that the safe income of the shares of each corporation held by each brother should be calculated separately, and that no netting or combination of the resultant amounts is appropriate.

This opinion is not a ruling, as explained in paragraph 24 of Information Circular 70-6R.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch