26 August 1997 External T.I. 9713655 - SAFE INCOME - INCESTUOUS SHAREHOLDINGS

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 an allocation of safe income must be made to the shares of a parent company held by its wholly-owned subsidiary (e.g. An incestuous shareholding between a parent and subsidiary corporation is allowed under the B.C. Company Act).

Position:

Yes, regardless that on a consolidated basis safe income of the parent corporation has not changed.

Reasons:

Subco's shares in Parentco are entitled to its proportionate share of Parentco's consolidated safe income during the relevant holding period of those shares.

	                          	    971365
XXXXXXXXXX		                                 Jim Wilson

Attention: XXXXXXXXXX

August 26, 1997

Dear Sirs:

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

This is in reply to your letter dated May 22, 1997 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, whether the Department's positions on allocation of safe income apply equally to incestuous shareholdings. In this regard you have asked us to consider a hypothetical situation where a wholly-owned subsidiary ("Subco") owns shares in its parent company ("Parentco"), both of whom were incorporated in British Columbia, and whether an allocation of safe income must be made to the shares of Parentco held by Subco. An incestuous shareholding between a parent and subsidiary corporation is allowed under the B.C. Company Act.

We disagree with you that "only shares held by parties outside the consolidated entity should be considered in allocating safe income". We recognize, using your example, if shares of Parentco held by the Subco are redeemed, the resulting dividend would erode Parentco's direct safe income and increase Subco's direct safe income. Consequently, the safe income of Parentco, computed on a consolidated basis, would not change. However, if the Department were to consider that Subco's shares in Parentco are not entitled to its proportionate share of Parentco's consolidated safe income during the relevant holding period of those shares, Subco would not be able to receive a safe dividend. This would not be appropriate where all or a portion of the gain in the shares of Parentco held by Subco is attributable to safe income of Parentco.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

Yours truly,

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