17 October 1988 Income Tax Severed Letter 5-6482 - Re: Subsection 55(2) of the Income Tax Act

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

R.H. Joyce (613) 957-2092

Oct. 17 1988

Dear Sirs:

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

This is in response to your letter of August 17, 1988 wherein you requested confirmation of certain statements made by J.R. Robertson in a paper presented at the 1981 Canadian Tax Foundation Conference.

We wish to confirm that the following statements contained in the aforementioned paper by Mr. Robertson continue to reflect the Department's position with respect to the application of subsection 55(2) of the Income Tax Act ("the Act").

(1) Where a share is exchanged for shares on a rollover basis, the portion of "... income earned or realized after 1971..." ("safe income") of the corporation to which the exchanged share would have been entitled immediately before the exchange will flow through to the new share.

(2) All shares of the corporation in which the new shares have been issued will share pro rata in the safe income of that corporation from the time of the exchange in accordance with their entitlement to participate in the income of the corporation, which entitlement would, of course, depend upon the terms and conditions of a particular share.

(3) Where a corporation acquires a share as a result of a section 85 rollover, such a transferred share will retain its share of safe income that would have been paid as a safe income dividend immediately before the transfer. In effect, the transferee's holding period in respect of such a transferred share includes the transferor's holding period.

For further clarification of these statements, we would direct your attention to the additional comments made in support thereof in paragraphs c) and d) on page 85 of the 1981 Conference Report. In addition, we would point out that if more than one class of shares (the "new shares") is received for the exchanged shares, an allocation of the safe income in respect of those exchanged shares must be made to the new shares on the basis of the relative fair market values of those new shares.

Confirmation was also requested that the amount of safe income attributable to a share is not eliminated or negated in the situation where an individual dies and such shares are left outright to a surviving spouse where the rollover provisions of subsection 70(6) of the Act apply.

It is our opinion that where a surviving spouse acquires a share as a result of the death of his or her spouse and the provisions of subsection 70(6) apply, the comments in paragraph (c) on page 85 of the 1981 Conference Report are broad enough to yield the same result relative to this subsection as with the other rollover provisions noted therein.

Yours truly,

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