D & D Livestock – Tax Court finds that stock dividends could be used to double-up on safe income

The safe income on hand (SIOH) of the holding company (HLL) for the taxpayer in respect of its shares of the taxpayer included safe income of $1.0M earned directly by the taxpayer and a further $0.5M earned in respect of a 50% shareholding (RTI shares) held by a subsidiary of the taxpayer (Newco 3).

A stock dividend of $1.5M paid by the taxpayer to HLL reduced such SIOH of HLL to nil.  However, the taxpayer successfully argued that this stock dividend did not reduce its SIOH in respect of its shares of Newco 3.  Accordingly, it could (and did) receive a further stock dividend of $0.5M from Newco 3 free of capital gains tax under s. 55(2).

Through other transactions (relying on ss. 85(1)((g) and (h)) the basis bump from the two stock dividends was combined in the ACB of the shares, held by a successor of HLL, in a replacement holding company for the RTI shares (Newco 2), so that on a sale of Newco 2 to a 3^rd-party purchaser, the $0.5M safe income generated in respect of RTI effectively could be double-counted.

In other words, since the 1^st stock dividend did not reduce the taxpayer’s SIOH in respect of its indirect investment in RTI, it effectively was able to use that SIOH a 2^nd time to reduce a capital gain on a 3^rd–party sale.

Neal Armstrong.  Summary of D & D Livestock Ltd. v. The Queen, 2013 TCC 318 under s. 55(2).