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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
XXXXXXXXXX 972082
Attention: XXXXXXXXXX
August 29, 1997
Dear Sirs:
Re: Safe Income Allocated to Stock Dividend Shares
We are writing in response to your letter of July 31, 1997 wherein you requested a technical interpretation concerning the application of subsection 55(2) of the Income Tax Act to the proposed redemption of certain preferred shares which were received as a stock dividend.
The situation described in your letter appears to involve an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be provided in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. However, we can offer the following general comments which we hope will be of assistance to you.
The Department's views regarding the effects that a stock dividend would have on the safe income attributable to shares of a corporation were expressed in Mr. R.J.L. Read's address to the 1988 Conference of the Canadian Tax Foundation. On page 18:9 of the Report of Proceedings of the Fortieth Tax Conference, Mr. Read states:
"In the case of stock dividends, an analysis will be required, after the payment of the stock dividend, of the gain inherent in the original shares and in the shares constituting the stock dividend, to ascertain the extent, if any, to which such gains are attributable to income earned or realized by the corporation. For example, in the case of stock dividends consisting of shares having a high redemption amount and nominal paid-up capital, an allocation should be made of the safe income and safe income on hand formerly attributable to the shares on which the dividend was paid, on the basis of the relative amounts of the gains inherent in the original shares and in the shares constituting the dividend. The amount of the stock dividend, as defined in subsection 248(1), will reduce the safe income on hand of any issued shares of the corporation."
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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