2018-0780061C6 2018 CTF - Q1 - Allocation of 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.

Principal Issues: Whether the CRA has finalized study on the allocation of safe income to discretionary dividend shares.

Position: Study finalized. All positions expressed since the 2015 CTF conference on this matter remain valid. However, future questions on this subject will only be dealt with in the context of a ruling request. See below.

Reasons: see below.

Author: Ton-That, Marc

Section: 55(2)

2018 CTF Annual Conference

CRA Roundtable

Question 1: Allocation of safe income to discretionary dividend shares – study update

At the 2016 CTF Annual Conference, the CRA indicated that it was conducting a study of how safe income should be allocated for corporations that have issued shares that are entitled to discretionary dividends, and when a dividend disproportionate to the respective pro rata interest is declared on such shares. Can the CRA provide an update on this study?

CRA Response

In response to Question #2 of the 2016 Round Table of the CTF annual conference, the CRA indicated that it would express no further view on the matter of allocation of safe income to discretionary dividend shares until the completion of an internal study.  We would like to inform you that such study is now completed.  As a result, we would like to make the following announcements:

*     The CRA stands by all positions expressed by it on the matter of discretionary dividend shares since the 2015 CTF annual conference.

*     The CRA will accept to provide assurance on the tax treatment of a share structure that includes discretionary dividend shares only in the context of a ruling request.  As such, the CRA will no longer express its views on the allocation of safe income to discretionary dividend shares in technical interpretation requests or round table questions.  The CRA considers that a ruling request is the more appropriate avenue to deal with these questions for the following reasons:

o     The determination of the amount of safe income that is attributable to shares of a corporation is a question of fact and can only be made by considering all the facts and circumstances of a given situation.

o     Situations that involve discretionary dividend shares generally require an analysis that provisions such as subsection 15(1), 56(2), 69(1), 245(2), 246(1) or similar provisions do not apply in the circumstances.  Such analysis also requires a review of all the relevant facts, proposed transactions and purposes of the proposed transactions.

o     Technical interpretations or round table questions and answers on this topic that, by nature, only contain a brief summary of a hypothetical situation, may be misleading if they are relied upon to apply to a specific fact situation.

*     Finally, we wish to reiterate that the use of a share structure containing discretionary dividend shares may raise technical issues in certain cases. For example, this type of share structure may become problematic if and when a butterfly distribution is envisaged under paragraph 55(3)(b) for a corporation that has issued such shares since it could be impossible to determine whether the butterfly distribution would qualify as a distribution under subsection 55(1) because of the uncertainty in establishing the fair market value of the shares of the corporation.


Marc Ton-That
November 27, 2018

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