28 March 1995 External T.I. 9430955 - SAFE INCOME STOCK SPLITS

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: - Will a crystalization of a capital gain on a rollover affect the safe income associated with the shares?

Position TAKEN: yes there is a proportinate reduction based upon capital gain existing at time of rollover

Reasons FOR POSITION TAKEN: - Recognize the reduction due to capital realized on transfer as per position expressed in Robertson paper presented in 1981.

		943095
XXXXXXXXXX	M.P. Sarazin
(613) 957-2118

Attention: XXXXXXXXXX

March 28, 1995

Dear Sirs:

Re: Calculation of Safe Income

Your facsimile dated December 1, 1994 addressed to the Vancouver District Office regarding the computation of safe income attributable to the shares of a particular corporation has been forwarded to us for reply.

Comments

It appears that the interpretation you seek relates to actual transactions concerning actual taxpayers. If the situation described relates to an actual transaction which has already been implemented, the review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers and all relevant facts are not known. If, however, the situation described relates to an actual proposed transaction, it should be the subject of an advance income tax ruling request. However, we can provide you with the following general comments.

The Department's views regarding the effects that a stock dividend would have on the safe income attributable to shares of a corporation were expressed in Mr. R.J.L. Read's address to the 1988 Conference of the Canadian Tax Foundation. On page 18:9 of the Report of Proceedings of the Fortieth Tax Conference, Mr. Read states:

"In the case of stock dividends, an analysis will be required, after the payment of the stock dividend, of the gain inherent in the original shares and in the shares constituting the stock dividend, to ascertain the extent, if any, to which such gains are attributable to income earned or realized by the corporation. For example, in the case of stock dividends consisting of shares having a high redemption amount and nominal paid-up capital, an allocation should be made of the safe income and safe income on hand formerly attributable to the shares on which the dividend was paid, on the basis of the relative amounts of the gains inherent in the original shares and in the shares constituting the dividend. The amount of the stock dividend, as defined in subsection 248(1), will reduce the safe income on hand of any issued shares of the corporation."

The Department's views regarding the effects that stock transfers would have on the safe income attributable to shares of a corporation were expressed in Mr. J.R. Robertson's address to the 1981 Conference of the Canadian Tax Foundation. On page 85 of the Report of Proceedings of the Thirty-third Tax Conference, Mr. Robertson states:

"c) Where a share (the exchanged share) is exchanged for a share or shares (the new shares) on a rollover basis the portion of safe income of the corporation to which the exchanged share would have been entitled immediately before the exchange will flow through to the new shares. ...

d) When a corporation acquires a share as the result of a section 85 rollover such a transferred share will retain its share of safe income that could have been paid as a safe dividend immediately before the transfer. In effect the transferee's holding period in respect of such a transferred share includes the transferor's holding period. This is reasonable because the transferor's potential gain on those shares becomes the transferee's potential gain."

Generally, when a portion of the capital gain inherent in the shares of a corporation is crystallized, the Department's approach, consistent with the principles outlined in Mr. Robertson's address, is to apportion the safe income to which the entire gain is attributable proportionally to each part of the gain. A transferee's safe income attributable to the shares received would be computed by multiplying the safe income attributable to the transferred shares immediately before the transfer by the proportion that the transferee's potential gain (immediately after the transfer) is of the transferor's potential gain (immediately before the transfer). Where the transferor has crystallized the full amount of the capital gain inherent in the common shares of the corporation, there will be no potential gain on the common shares which are transferred to the transferee and, as such, none of the safe income attributable to the common shares immediately before the transfer would be attributable to such common shares in the hands of the transferee.

We trust that the foregoing comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch