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.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
July 5, 1995
Re:Calculation of Safe Income
We are writing in response to your letter of June 21, 1994 wherein you requested a technical interpretation with respect to the application of subsection 55(2) of the Income Tax Act (the "Act") to certain transactions described in your letter. We apologize for the delay in responding. The situation described in your letter is as follows:
1.XCo. is a public corporation and is not liable to Part IV tax. YCo. is exempt from tax under Part I of the Act and is not liable to Part IV tax by reason of subsection 227(14) of the Act.
2.XCo. and YCo. each own 50% of the shares of Holdco. Such shares have been owned since the incorporation of Holdco. Holdco is a Canadian-controlled private corporation.
3.Holdco owns a capital property (the "Asset") which has an adjusted cost base of $60 and fair market value of $100.
4.Holdco wishes to sell the Asset. For business reasons the Asset will be transferred to a newly incorporated subsidiary ("Newco") and sold by Newco to an arm's length third party.
5.Holdco transfers the Asset to Newco in consideration for common shares of Newco. Holdco and Newco will jointly elect to pursuant to subsection 85(1) of the Act to transfer the Asset at an agreed amount of $60.
6.Newco will sell the Asset to an unrelated third party for $100. The taxable capital gain realized on the disposition will be $30. Accordingly, Newco's Canadian investment income as defined in subsection 129(4) of the Act would be $30 so that $6 would be added to Newco's refundable dividend tax on hand ("RDTOH") pursuant to subsection 129(3) of the Act.
7.Newco declares and pays a dividend of $24 to Holdco in order to give rise to a dividend refund of $6.
8.Holdco would be liable to Part IV tax of $6. Accordingly, Holdco declares and pays a taxable dividend of $24 in order to give rise to a dividend refund of $6. XCo and YCo are not liable to Part IV tax on the dividend.
The situation described by you seem to relate to specific proposed transactions. Confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R2. Having said this, we are able to offer the following general comments on your situation.
Subsection 55(2) of the Act, read in light of the situation described, will apply to a dividend received as part of a series of transactions, one of the purposes of which was to effect a significant reduction in the portion of the capital gain that would have been realized on a fair market value disposition of a share immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized before the commencement of the series of transactions.
If in the circumstances described the dividend is part of the series that included the sale of the Asset, the taxable capital gain arising on the sale would not be included in computing the income earned or realized by Newco, as defined in paragraph 55(5)(c) of the Act. If the dividend is not part of the series that included the sale of the Asset, the taxable capital gain would be included in income earned or realized of Newco and when paid to Holdco would be included in the computation of income earned or realized of Holdco, as defined in paragraph 55(5)(c) of the Act.
What is included as part of a series of transactions, as defined in subsection 248(10) of the Act, is a question of fact.
The foregoing comments relate solely to the question of what amounts are included in the computation of income earned or realized for the purposes of subsection 55(2) of the Act and do not address any other aspect of subsection 55(2) or any other provision of the Act.
The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
Reorganizations and Foreign Division
Income Tax Rulings and
Policy and Legislation Branch
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