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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Manitoba Bar Association/
Institute of Chartered Accountants of Manitoba
1993 Round Table
Question No 6
Subsection 55(2) - Safe income - Transfer of shares under subsection 85(1)
- a) A taxpayer transfers shares of an operating company to a holding company, in exchange for shares of the holding company. A joint election is filed under subsection 85(1), electing at the adjusted cost base of the shares to the transferor. Please confirm that the safe income attributable to the new shares received by the taxpayer will be equal to the safe income attributable to the transferred shares.
- b) Alternatively, if the transfer of shares results in a loss (i.e. fair market value is less than adjusted cost base) but a section 85 election is made at the fair market value of the shares, will the safe income of the new shares be equal to the safe income of the old shares ?
Answer
- a) Where a shareholder transfers the shares of his operating company to a holding corporation under subsection 85(1) of the Act and the agreed amount is equal to the adjusted cost base of the shares transferred, the inherent gain in the shares of the holding company held by the transferor following the transfer will be considered to be attributable to income earned or realized by the operating company after 1971 for purposes of subsection 55(2) ("safe income") to the same extent that the inherent gain on the shares of the operating company was attributable to such safe income before the transfer.
- b) Where a transfer of shares at fair market value to a holding corporation results in a loss, whether the transfer is made under subsection 85(1) of the Act or not, the safe income, if any, attributable to the shares transferred can not be transferred to the holding corporation. Any capital gain which could be realized on the disposition of the shares of the holding corporation can not be considered to be attributable to income realized by the operating company before the transfer. File 7-923771 Prepared by : Marc Ton-That January 12, 1993
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