30 May 1997 External T.I. 9635275 - SAFE INCOME

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 a dividend reduces the safe income?

Position:

General comments.

Reasons:

Letter not clear. Client did not return our telephone call.

XXXXXXXXXX		5-963527

Attention: XXXXXXXXXX

May 30, 1997

Dear Sirs:

Re: Safe Income

This is in reply to your letter of October 18, 1996 wherein you requested our opinion concerning the computation of the safe income. We apologize for the delay in responding.

In your letter, you describe certain transactions. We are told that these transactions should be regarded to be part of two distinct series of transactions. In the second series, a dividend is paid prior to the sale of shares. You ask whether the safe income realized by the corporation in the course of the first series of transactions can be paid out prior to the dividend preceding the sale of shares.

Comment

The situation outlined in your letter appears to involve an actual proposed transaction with identifiable taxpayers. As indicated in Information Circular 70-6R2, we do not express opinions on specific transactions otherwise than by way of advance income tax rulings. While we are unable to comment on the income tax consequences attendant on the specific facts described in your letter, we provide the following general comments which we hope will be of assistance to you.

Subsection 55(2) of the Act allows the recharacterization of a dividend payment into proceeds of disposition of a share or into a gain to the extent that the purpose of the dividend (or the result of the dividend, depending on the circumstances) is to effect a reduction in the portion of the capital gain that is attributable to something other than the income earned or realized by the corporation (the corporation's safe income) before the beginning of the series involving the dividend.

Subsection 55(2) of the Act can apply with each dividend received by a corporation. Generally, a dividend on a share of a corporation that does not exceed the safe income on hand attributable to that share can be paid without the risk of subsection 55(2) applying. This is because subsection 55(2) of the Act can only apply if the portion of the capital gain that is reduced is attributable to something other than the safe income of the corporation at the beginning of the series of transactions that includes the dividend.

In the "Comments" portion of your letter, you suggest that the dividend paid in the course of the first series should not affect the ability of the corporation to pay out its safe income prior to the sale of the shares. This statement may or may not be correct depending on the circumstances, since the first dividend could reduce the safe income of the corporation that remains on hand to be distributed prior to the sale of the shares.

We note that on December 2, 1996 the Minister of Finance tabled Bill C-69, an Act to amend the Income Tax Act ("Act") that, inter alia, proposed changes to section 55 of the Act ("Proposed amendments"). Included in the Proposed amendments, is a new cut-off point for the period for determination of the safe income. The new cut-off point is referred to as the "safe-income determination time". It is proposed that a definition of this new term, which is relevant for the purposes of subsection 55(2), be included in subsection 55(2) of the Act. Bill C-69 died on the order paper, but it may be reintroduced in the next session of Parliament.

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

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