17 March 1997 External T.I. 9632725 - SAFE INCOME ENTITLMENTS OF ALPHABET SHARES

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:

What are the safe income entitlements to "alphabet shares"?

Position:

General rules still apply.

Reasons:

Shares participate in safe income based on their dividend entitlements and so should alphabet shares if their value is partially derived from such dividend entitlments.

963272
XXXXXXXXXX Jim Wilson
(613) 957-2123

March 17, 1997

Dear Sir:

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

We are writing in response to your letter of September 30, 1996 wherein you requested our comments regarding the application of subsection 55(2) of the Act. You have asked us to consider, with respect to the allocation of "income earned or realized by any corporation after 1971 ("safe income") to a particular share, the effect of corporate share conditions that require that income from a specific source must be paid on a specific class of shares. As an example, the corporate share conditions may require that the Class A shares are solely entitled to income from a specific division of the corporation while the Class B shares are entitled solely to income from some other division of the corporation.

In general, safe income of a corporation is attributable to a particular share of the corporation in accordance with the holding period of the share and its entitlement to participate in the income of the corporation. Thus, a preferred share would participate in safe income of a corporation in accordance with its dividend entitlement, which entitlement would be affected by such share conditions as well as the cumulative or non-cumulative nature of the preferred share. A common share would generally be entitled to participate in the safe income of a corporation pro-rata with other common shares after the allocation of safe income to preferred shares.

It should, however, be noted that safe income can be paid out as a safe dividend only to the extent that such safe income has contributed to the gain inherent in the share. Where, at the time a share is issued, there is an accrued gain inherent in the share (for example, where the share is issued as consideration for an asset with an accrued gain which is transferred to a corporation on a tax-deferred basis under section 85), it is our view that such accrued gain will always be tainted for the purposes of subsection 55(2) of the Act. This is so because the realization of the accrued gain relating to the transferred asset will not, in and by itself, increase the amount of the gain which was inherent in the share at the time of its issue.

We trust you will find the above comments of some assistance.

Yours truly,

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