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.
Dear Sirs:
Your letter of June 7, 1985 raised several questions related to the safe income calculation for purposes of subsection 55(2) of the Income Tax Act (the "Act").
Your first question dealt with the safe income calculation of a parent corporation which has a subsidiary with negative safe income and an unrealized capital gain of an approximately equal amount. The fair market value of the shares of the subsidiary is equal to the parent's adjusted cost base of those shares, so there is no gain inherent in the shares of the subsidiary. Our position is that the safe income of the parent and subsidiary should be calculated on a consolidated basis.
Subsection 55(2) of the Act will apply if the parent pays a dividend that reduces the inherent gain in the shares of the parent "... attributable to anything other than income earned or realized by any corporation after 1971..." The gain inherent in the shares of the parent reflects both the negative safe income of the subsidiary and the unrealized capital gain in the subsidiary's assets, which are equal in your example. If these two components of the inherent gain in the parent's shares were ignored, and a dividend was paid by the parent equal to its unconsolidated safe income, that dividend would exceed the inherent gain in the shares of the parent attributable to income earned or realized by any corporation after 1971 by the amount of the subsidiary's negative safe income, and subsection 55(2) of the Act would apply.
Your second question concerned the safe income calculation following a spousal transfer of shares. It is our view that the safe income attributable to a share prior to a spousal transfer is acquired by the transferee upon a spousal transfer which is subject to the provisions of subsection 73(1).
Finally, in response to the last point which you raised, we confirm that the issuance of new shares by a corporation will not affect the safe income attributable to previously issued shares in respect of income earned or realized prior to the issuance of the new shares.
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© Her Majesty the Queen in Right of Canada, 1985
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© Sa Majesté la Reine du Chef du Canada, 1985
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