29 August 1989 Ruling 58471 F - Inter-Corporate 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.

August 29, 1989

Dear Sirs:

Re:  Subsection 55(2) of the Act

This is in response to your letter of August 3, 1989 wherein you requested our opinion with respect to the following hypothetical situation:

     "1.  Opco, Holdco, Aco and Bco are each taxable Canadian corporations as defined in paragraph 89(1)(i) of the Income Tax Act (Canada) (the "Act").  Opco is a wholly owned subsidiary of Holdco.  The issued and outstanding shares of Holdco are held 40% by Aco and 60% by Bco.  Aco and Bco each acquired their shares of Holdco at the same time.  Thus, it is assumed that for all relevant purposes, the holding period of all parties is the same.

     2.  In accordance with the Robertson Rules, Opco's safe income has been computed as $8,000,000 and the safe income of Holdco on an unconsolidated basis has been computed as $2,000,000. Thus, the safe income of Holdco on a consolidated basis is $10,000,000.

     3.  It is proposed that Aco will sell its 40% interest in Holdco to Bco but that prior to such sale, a dividend will be paid by Holdco to Aco equal to its proportionate share of safe income.  Specifically, it is proposed that a dividend in the amount of $4,000,000 (equal to 40% of Aco's consolidated safe income of $10,000,000) be paid.

     4.  Subsequent to Bco's acquisition of the remaining 40% interest in Holdco from Aco, Bco proposes to cause the sale of the shares of Opco to an arm's length third party.  Prior to such sale, it is proposed that Holdco will declare a dividend to Bco equal to its proportionate share of Holdco's consolidated safe income.   Specifically, a dividend in the amount of $6,000,000 (60% of Holdco's consolidated safe income of $10,000,000) will be paid.

     5.  In the alternative to the transaction described in paragraph 4 above, but subsequent to Holdco's payment of a safe dividend to Aco as described in paragraph 3 above, and Bco's purchase of Aco's 40% interest in Holdco, Opco will pay a dividend to Holdco to the extent of its safe income.  Thus, Opco will pay a safe dividend in the amount of $8,000,000 with the result that Holdco will then have safe income of $10,000,000. Holdco will then pay a safe dividend to Bco equal to its proportionate share being 60% of $10,000,000."

Opinions

A.     We agree that the consolidated safe income of Holdco is $10,000,000, and it is not a prerequisite to first pay a dividend from Opco to Holdco.

B.     We agree that, after the dividend to Aco, the consolidated safe income of Holdco with respect to Bco is $6,000,000.

C.     With respect to your third requested opinion you state;

     "The amount of the safe dividend which a wholly-owned subsidiary may pay to its parent corporation is not reduced by the amount of a safe dividend which the parent corporation may have previously paid to one of its shareholders.  Thus, as described in paragraph 5 above, Opco's safe income remains at $8,000,000 and it may pay a safe dividend in this amount to Holdco notwithstanding the fact that prior to such event, a safe dividend of $4,000,000 was paid by Holdco to Aco based on Aco's proportionate interest in Holdco's consolidated safe income.  We assume however, that in this case, Holdco's safe income becomes $10,000,000 (initial $2,000,000 on unconsolidated basis plus $8,000,000 safe dividend from Opco) only with respect to Bco's shares in Opco so that if Aco had retained its shares in Holdco, it would not be entitled to a further safe dividend." 

     We disagree.  While Opco may pay a safe dividend of $8,000,000 to Holdco, the safe income of Holdco would be $6,000,000 $8,000,000 less negative safe income of $2,000,000 caused by the dividend to Aco).

Other

You have not disclosed how Holdco could pay a dividend to Aco without a proportionate dividend being paid to Bco.  Depending on the circumstances, the provisions of subsection 15(1), 56(2) or 245(2) of the Act may be applicable.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch