Harshness of cut-off at beginning of series (being, generally, the beginning of sale negotiations) (pp. 34-35)
Prior to the introduction of the concept of “safe-income determination time”, the cut-off point for the safe income calculation was the beginning of the series of transactions. We understand that one reason for this early cut-off point was that the Department of Finance wanted to prevent taxpayers from artificially deferring the disposition of shares in order to benefit from the realization of future safe income or from converting earn-out payments into safe income payments. [FN 44 gives, as an example, issuing earnout preferred shares of the target to the vendor at the closing which, if the earnings are realized post-closing, could subsequently redeemed giving rise to a deemed dividend which, but for the cut-off, would come out of safe income.] However, the early cut-off was found to be unnecessarily harsh and prevented the payment of safe income to a shareholder who would otherwise be entitled to it. [FN 45: In Revenue Canada’s view, the commencement of negotiations for a disposition of shares would constitute the beginning of the series with respect to that disposition [citing Q.2 of the 1988 Robert Read paper, “Section 55: A Review of Current Issues,” which is less crisp than this].] For example, income earned by a corporation after the beginning of the series or gains realized on dispositions of assets by the corporation after the beginning of the series were not available to be paid out as safe income dividends to the corporation’s vendor.
Alleviation through introduction of SIDT (p. 35)
The concept of “safe-income determination time” was introduced in an attempt to restore some fairness to the rules. In fact, the new concept resolves some obvious problems that existed before. For example, even where a shareholder has started negotiations for the sale of a corporation’s shares, the disposition of some properties by the corporation for proceeds equal to fair market value would not trigger the safe-income determination time, and the gain realized on the sale could be paid out as safe income to the shareholder.
The rules are designed so that the cut-off point for the safe income calculation would be any change of interest at the shareholder level through a disposition to or an increase in an interest of an unrelated person or immediately before any dividend is paid to a shareholder. Therefore, a departing shareholder could not convert common shares into participating preferred shares and continue participating in safe income as described above.
Alleviation of already narrow concept of series (commencing with negotiations) through introduction of SIDT definition (pp. 34-35)
- Prior to the introduction of the safe-income determination time definition, the Revenue Canada position was that the series of transactions referred to in s. 55(2) generally started with the commencement of negotiations for a disposition of the shares in question.
- The purpose of the introduction of the more limited cut-off time under the new safe-income determination time definition was to permit safe income earned after the commencement of negotiations and before any change of interest at the shareholder level through a disposition to or an increase in an interest of an unrelated person (or the payment of a dividend) to continue to add to the computed usable safe income.
Email this Content