4 June 1989 Income Tax Severed Letter 5-7336 - [Subsection 55(2) of the Income Tax Act—Safe Income]

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

D. Hartman (613) 957-2120

JUN 4 1989

Dear XXXX,

Re: Technical Interpretation of subsection 55(2) of the Income Tax Act (Canada) (the "Act")

This is in reply to your letter of January 6, 1989 in which you request a technical interpretation with respect to subsection 55(2) of the Act in the following hypothetical situation.

A corporation ("Payor") will pay a dividend on its common shares in the amount of $100 to another corporation (the "Recipient"). Payor and Recipient are both private corporations and resident in Canada for the purposes of the Act. The "safe income", for the purposes of subsection 55(2) of the Act, in respect of the common shares of the Payor held by Recipient is estimated to be $75 prior to the payment of the above-mentioned dividend. Payor will receive a dividend refund of $5 in respect of the dividend in accordance with subsection 129(1) of the Act and Recipient will be liable for tax under Part IV of the Act in accordance with subsection 186(1)(b) of the Act in the amount of $5. Recipient, in accordance with paragraph 55(5)(f) of the Act, will designate portions of the $100 dividend to be separate taxable dividends in the amounts of $60, $15 and $25. For the purpose of this letter, it is assumed that the $5 refund to be received by Payor arose in respect of tax paid under Part I of the Act on investment income received by Payor prior to these transactions.

You submit that since Recipient is entitled to "safe income" of $75 and $20 of the dividend is subject to tax under Part IV of the Act (the "$20 portion"), which is not refunded as a consequence of the above series of transactions, $95 of the $100 dividend should not be subject to subsection 55(2) of the Act. You then question how the $20 portion should be allocated to the three separate taxable dividends resulting from the designations in accordance with paragraph 55(5)(f) of the Act.

In the situation described above, the refund of $5 to Payor results with respect to income subject to Part I tax. Such income, would on an after tax basis have been included in the calculation of safe income. Consequently it is our opinion that if an exemption from the application of subsection 55(2) is realized because Part IV tax is paid by Recipient on the distribution of such income, the amount distributed would be considered to be a payout of safe income. Accordingly in the above example a maximum of $75, being the designated separate dividends of $60 and $15 would be exempted.

If in the above example, the balance of safe income on hand was nil, it is our opinion that $20 would be exempt from the provisions of subsection 55(2) of the Act by virtue of the exemption for the payment of Part IV tax by Recipient that was not refunded. The dividend payment would be taken in to consideration in any future calculation of safe income.

Yours truly,

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