2024-1005011E5 Safe income

Principal Issues: Clarification on various topics discussed in paper "CRA Update on Subsection 55(2) and Safe Income".

Position: See below.

Reasons: See below.

Author: Ton-That, Marc
Section: 55(2)

XXXXXXXXXX                                                              2024-100501
                                                                                      Marc Ton-That

January 30, 2024

Dear XXXXXXXXXX:

Re: Questions regarding “CRA Update on Subsection 55(2) and Safe Income – Where Are We Now”

This is in response to your letter dated January 22, 2024, wherein you requested clarification of your understanding regarding a few topics discussed in the above-mentioned paper that was delivered to the Canadian Tax Foundation on December 22, 2023.

Below is a succinct response to your questions.

Changes in position

1. The terms Direct Safe Income and Indirect Safe Income are used to better differentiate between the safe income realized by a corporation and the safe income that is consolidated from subsidiaries of that corporation. Together, they form the safe income of the corporation. The terms are only descriptive and do not constitute new positions. Our long-standing position on safe income consolidation remains the same.

2. We understand that the positions expressed (or announced) in the paper and previous round table questions or technical interpretations regarding the allocation of safe income on reorganizations may be viewed as a change in position or, more accurately, new positions, since there was no position expressed by the CRA in that area in the past. Such positions would apply to reorganizations carried out after their announcement date in such paper, round table questions or technical interpretations. However, we would like to point out that the calculation of safe income, and the allocation of safe income on reorganizations, even if carried out before the announcement date, has to be made on a reasonable basis and should not give rise to any inappropriate cost increase. That fundamental principle has no “coming into force” date.

Example 30 of the paper and double-taxation

This example serves to illustrate the concept that a dividend income that has not been subject to tax should not constitute safe income for the benefit of a shareholder. The order of transactions described in the example would unlikely be implemented as such in the real world (for example, Subco1 does not need to redeem its shares held by Opco to achieve the results sought by Holdco) and a discussion on possible double-taxation in the scenario described is fruitless. We would also like to point out that, from a purely technical perspective, since a dividend received by Opco from Subco1 on the redemption of shares of Subco1 would not be exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(a) and, therefore, taxed as a capital gain, the normal integration principles would apply. Therefore, the capital gain realized by Opco on the redemption of shares of Subco1 would be included in the safe income of Opco and would not result in any double-taxation. Unfortunately, the deemed capital gain under subsection 55(2) would not be part of the safe income computed before the safe income determination time if all the transactions described are part of the same series of transactions. However, we understand that transactions can be successfully implemented in a way to attract only one level of taxation if the ordering of transactions is carefully thought out and taxpayers do not attempt to systematically avoid taxes on a disposition.

Misalignment and streaming

You asked us to describe acceptable methods of ACB streaming to avoid a misalignment of basis on a reorganization. Unfortunately, we cannot suggest any tax planning technique. If you have a transaction in mind for which you would like to ascertain its tax consequences, we would be happy to entertain a ruling request. However, we would like to refer you to documents 2009-0330161C6 and 2013-0495821C6 that discussed situations where an exchange of shares constitutes or not a disposition.

We trust the above comments will be of assistance.

Yours truly,

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

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