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: Whether safe income entitlement of shares of a remaining shareholder in a "single-wing buttefly" is affected by the butterfly.
Position: Yes
Reasons: Safe income entitlement of remaining shareholder(s) will not be affected only if redemption of the shares of the departing shareholder does not reduce fmv of the remaining shares.
XXXXXXXXXX 961052
Attention: XXXXXXXXXX
November 18, 1998
Dear Sirs:
Re: Subsection 55(2) of the Income Tax Act (the "Act")
This is in reply to your letter of March 20, 1996, wherein you requested our opinion regarding the impact on a corporation's safe income of a series of transaction described therein.
The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As mentioned in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, it is not the practice of this Department to provide opinions with respect to proposed transactions other than in the form of advance income tax rulings. On the other hand, the tax consequences of completed transactions are best determined by our Tax Services Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer you the following general comments which may be of some assistance.
The Department's views on the computation of safe income were expressed in Mr. John R. Robertson's address to the 1981 annual tax conference of the Canadian Tax Foundation. These views were subsequently updated by Mr. Michael A. Hiltz at the Canadian Tax Foundation's 1984 annual corporate management tax conference and 1991 annual tax conference, as well as by Mr. Robert J.L. Read at the Canadian Tax Foundation's 1988 annual tax conference.
Pursuant to subsection 55(2) of the Act, the capital gain referred to therein must be attributable to "income earned or realized" ("safe income") in order that the dividend referred to therein not be subject to that subsection. However, it is the Department's position that safe income can contribute to the fair market value of, or the gain inherent in, a share only if such safe income is on hand and available for distribution to the corporation's shareholders ("safe income on hand"). Consequently, a dividend will be considered to be attributable to a corporation's income earned or realized after 1971 ("safe dividend") only where it is reasonable to consider that such dividend has been paid out of the corporation's safe income on hand. Therefore, it should be remembered that it is possible for a computation of safe income based only on income earned in the holding period to result in an amount that is greater than that which is on hand and that can be paid as a safe dividend.
As commented on by Mr. Hiltz at the 1984 Corporate Management Tax Conference, it is the Department's opinion that in the case where a particular shareholder's shares in a corporation are redeemed and a deemed dividend arises, the safe income entitlement of other shares of the corporation will not be affected if the redemption does not reduce the fair market value of the other shares. In the case of a "single-wing butterfly transaction", the proportionate amount of the safe income attributable to the shares of the remaining shareholder could be paid provided there is safe income on hand and available for distribution.
We trust that these comments will be of assistance to you in computing the safe income on hand of the corporation referred to as "Opco" in your letter.
Yours truly,
for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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