3 February 1995 External T.I. 9429465 - SAFE INCOME AND DIVIDEND REFUND

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.

Principal Issues: Can a dividend be divided into a portion that is subject to Part IV and a portion that is paid out of safe income thereby maximizing the amount that is exempt from subsection 55(2)?

Position TAKEN: No

Reasons FOR POSITION TAKEN: A dividend is considered to be first paid out of safe income attributable to the shares of the corporation and Part IV is also applied to the first part of the dividend which is equal to 4 times the dividend refund realized by the payer corporation. Therefore, they are not considered separate and distinct dividends.

		942946
XXXXXXXXXX	M.P. Sarazin

Attention: XXXXXXXXXX

February 3, 1995

Dear Sirs:

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

This is in reply to your letter dated November 10, 1994 wherein you requested our comments regarding the application of subsection 55(2) of the Act in the situation where a dividend received by a corporate shareholder exceeds the income earned or realized after 1971 (the "safe income") attributable to the shares held by the corporate shareholder and the corporate shareholder is liable for Part IV tax on a portion of the dividend received due to the fact that the payer will be entitled to a dividend refund as a result of paying the taxable dividend. In addition, you have requested our comments regarding the effect that the dividend refund entitlement of the payer corporation would have on the safe income attributable to shares of the payer corporation held by the recipient corporation.

For discussion purposes, we shall assume that a corporation (the "recipient corporation") receives a taxable dividend of $1,000 from its subsidiary wholly-owned corporation (the "payer corporation"). The recipient corporation has $400 of safe income attributable to its shares of the payer corporation and the payer corporation is entitled to a dividend refund of $200 as a result of the payment of the dividend. The recipient corporation designates under paragraph 55(5)(f) of the Act that $400 of the dividend is a separate taxable dividend.

Comments

We are of the view that it is not possible to treat the portion of the dividend paid by the payer corporation which is subject to tax under Part IV of the Act as a separate and distinct dividend from the portion of the dividend that is paid out of the payer corporation's safe income. Any dividend paid by the payer corporation is considered to be paid first out of the safe income attributable to the recipient corporation's shares of the payer corporation. In addition, where a particular dividend will be subject to tax under Part IV of the Act because the payer corporation is connected with the recipient corporation and the payer corporation receives a dividend refund as a result of the payment of the taxable dividend, by virtue of paragraph 186(1)(b), the Part IV tax will be attributable to the first part of the dividend which is equal to 4 times the dividend refund receivable by the payer corporation. Therefore, the portion of the dividend received by the recipient corporation that would be subject to tax under Part IV of the Act would also include any safe income attributable to the shares of the payer corporation held by the recipient corporation. Consequently, the recipient corporation would not have to designate any amount under paragraph 55(5)(f) of the Act in any situation where the portion of the taxable dividend that is subject to tax under Part IV of the Act exceeds the safe income of the corporation.

In the above example, the first $800 of the dividend would be subject to tax under Part IV of the Act and this portion of the dividend would include the $400 which relates to the safe income attributable to the shares. As a result, we are of the view that subsection 55(2) will apply to the remaining $200 dividend because it is not paid out of safe income and it is not subject to tax under Part IV of the Act.

In computing the safe income during the holding period with respect to a particular share, it is our position that refundable taxes received in the period increase the amount of safe income attributable to the share. The holding period is generally the time from the later of January 1, 1972 or the acquisition of the particular share to the time immediately before the transaction or event or series of transactions or events. Consequently, any dividend refund received by the payer corporation or credited against the payer corporation's tax liability in the period after the payment of a dividend would not be included in the computation of the safe income attributable to the shares of the payer corporation immediately before the payment of the dividend because the dividend refund was not received during the holding period.

The above comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch