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.
972474
XXXXXXXXXX T. Harris
(613) 957-2114
Attention: XXXXXXXXXX
December 31, 1997
Dear Sirs:
This is in reply to your letter of September 16, 1997, in which you requested our interpretation of “income earned or realized by any corporation after 1971” (“Safe Income”) for the purposes of subsection 55(2) of the Income Tax Act (the "Act") in the hypothetical situation described in your letter.
You have described a hypothetical situation involving Parent, a taxable Canadian corporation, which owns all of the issued and outstanding shares of SubcoA and SubcoB, both of which are also taxable Canadian corporations. On a separate corporate entity basis, Parent has Safe Income on Hand of $100, SubcoA has Safe Income on Hand of $115 and SubcoB has Safe Income on Hand of $50. On a consolidated basis, therefore, the Safe Income on Hand that is available for distribution on the outstanding shares of Parent is $265. The issued and outstanding shares of Parent are owned by Vendor, another taxable Canadian corporation, which has agreed to sell its Parent shares to an arm’s length third party (“Purchaser”) for proceeds which would result in the realization of a substantial taxable capital gain. Prior to the sale, Vendor wishes to cause Parent to distribute the maximum possible amount of Safe Income on Hand in order to minimize the taxable capital gain to be realized on the sale. Also, prior to closing, Purchaser enters into an agreement to sell the shares of SubcoB to an arm’s length third party for fair market value proceeds.
You believe that Vendor could achieve its objective by causing Parent to increase the paid-up capital of its issued and outstanding shares by $265 in order to trigger a deemed dividend under subsection 84(1) of the Act. Such deemed dividend would also increase the adjusted cost base of Vendor’s shares of Parent by $265 pursuant to paragraph 53(1)(b) of the Act, thereby reducing the amount of the capital gain to be realized by Vendor.
You note that the test in subsection 55(2) is whether one of the purposes of the dividend is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of the shares of Parent immediately before the dividend and that could reasonably be considered to be attributable to anything other than safe income earned by any corporation after 1971 and before the commencement of the series of transactions which includes the dividend. Since, in your view, a deemed dividend from Parent to Vendor in the amount of $265 can reasonably be considered to be attributable to Safe Income on Hand of any corporation (i.e. Parent + SubcoA + SubcoB), subsection 55(2) should not apply to recharacterize the deemed dividend as additional proceeds from the sale of the Parent shares even though neither of SubcoA nor SubcoB has paid or is deemed to have paid a dividend to Parent.
You have also noted that in the situation where SubcoA and SubcoB are not deemed to have paid a subsection 84(1) dividend to Parent, the amount of the 88(1)(d) bump that Purchaser would be entitled to add to the cost of its shares of SubcoA and SubcoB on the winding-up of Parent would be increased. The reason being that Parent’s adjusted cost base of its shares of whichever of SubcoA or SubcoB had triggered the deemed dividend would have been increased by the amount of the deemed dividend. That increase in Parent’s adjusted cost base would reduce the aggregate amount available for the bump under paragraph 88(1)(d) of the Act.
The situation described in your letter would appear to involve an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. However, we can offer the following comments which we hope will be of assistance to you.
As stated at page 18:6 of the paper titled Section 55: A Review of Current Issues which was presented by R.J.L. Read at the 1988 conference of the Canadian Tax Foundation “In a case in which a parent corporation owns a subsidiary, the safe income of the parent is calculated on a consolidated basis as required by the phrase ‘income earned or realized by any corporation’ in the preamble of subsection 55(2). Therefore, the safe income of the subsidiary will be included in the consolidated safe income of the parent.” Consequently, we agree that a parent can pay a safe dividend to the extent of its consolidated safe income on hand notwithstanding that its subsidiaries have not first distributed their Safe Income on Hand to the parent.
Although in the situation where SubcoA and SubcoB are not deemed to have paid a subsection 84(1) dividend to Parent, the amount of the 88(1)(d) bump that Purchaser would be entitled to add to the cost of its shares of SubcoA and SubcoB on the winding-up of Parent may be increased, the aggregate adjusted cost base to Purchaser of any capital property distributed to it by Parent on the winding-up of Parent should not be affected. In other words, the fact that SubcoA and SubcoB are not deemed to have paid a subsection 84(1) dividend to Parent merely provides some flexibility to Purchaser with respect to the allocation of the adjusted cost base of its Parent shares between any capital property distributed to it on the winding-up of Parent.
The foregoing comments represent our general views with respect to the subject matter of your letter. These comments are provided in accordance with the guidelines described in paragraph 22 of IC 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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