55(2) >Overview > Purpose > prevents capital gains stripping

Transcription

1 SUBSECTION 55(2) SAFE INCOME ISSUES Blake, Cassels & Graydon LLP 55(2) >Overview > Purpose > prevents capital gains stripping 2

2 55(2) A sale gives rise to capital gain and tax Corp A 3 55(2) A Corp B Share redemption dividend; no tax Purchaser - Cash injection Corp A Long term deferral 4

3 55(2) 1.Taxable dividend received by a corp. resident in Canada deductible under 112(1)(2) or 138(6). 2. Has the dividend significantly reduced a capital gain that, but for the dividend, would have been realized on disposition at FMV of any share immediately prior to the dividend? 5 55(2) 3.Calculate the gain that the dividend has reduced. 4.Determine portion of gain attributable to income earned after 1971 and prior to safe income determination time. Rest of the gain is attributable to other than safe income. 6

4 55(2) 5.Was dividend part of a transaction or event or series one of the purposes of which was to effect a significant reduction in the portion of the gain attributable to something other than safe income. 6.If a deemed dividend arises under 84(3), apply results test. 7 55(2) 7.If purpose or applicable result test is met, then 55(2) applies subject to 55(3). Any portion that is subject to Part IV tax that is not refunded as part of the series is exempt. SEE CHART Taxation of Private Corporations at page 9:23 8

5 SUMMARY > may be applicable if: >significant reduction in the portion of the capital gain, that but for the dividend, would have been realized; and >could reasonably be attributable to anything other than income earned or realized by any corporation after SAFE INCOME > When is it determined? > Safe Income Determination Time > earlier of: >time that is immediately after earliest of disposition or increase in interest; and >the time that is immediately before the earliest time that a dividend is paid. 10

6 SAFE INCOME > What is it? > Income earned or realized by any corporation after 1971 > Consolidated approach; even foreign nonaffiliates > CRA Doc No C6 > 55(5)(b) (c) or (d), section SAFE INCOME ON HAND ( SIOH ) > income that is available and can be extracted as an intercorporate dividend without re-characterization > Robertson Rules > Numerous admin positions > Brelco supports on-hand concept 12

7 SIOH >Pre Kruco > The Queen v. Kruco > Issue > Federal Court of Appeal > Implications/Response 13 SIOH > CRA response to Kruco > Income Tax Technical News No. 33 >Taxes and dividends > Income Tax Technical News No. 37 >February 15, 2008 >Non-deductible expenses >Other amounts? 14

8 SIOH > CRA historical positions: > Amounts expended but not deductible >Amounts expended but not yet deducted >Amounts not yet expended but deducted for accounting purposes (but not for tax) 15 RECENT TECHNICAL INTERPRETATIONS > CRA Doc. No I7 > safe income reduced by each dollar of expense > CRA Doc. No E5(F) > non-deductible expenses > CRA Doc. No E5(F) > addition not added to safe income 16

9 LOSSES > Robertson Rules losses reduce safe income/can go negative > CRA Doc. No I7 > Losses reduce safe income as incurred even if not deducted > CRA Doc. No E5(E) > reduce safe income by anticipated capital loss on loan receivable > Is this correct after Kruco? > What is the relevant period? 17 STUB PERIODS > Period from acquisition date to the first year-end of the acquired corporation after the acquisition. > Period from date of last year-end to the determination time. 18

10 STUB PERIOD > CRA computation applies to both stub periods > must be reasonable and tax payer must support it > daily basis generally acceptable > VIH Logging Ltd. > CRA argued against stub period 19 STUB PERIOD > CRA post VIH Logging >safe income in holding period stub periods is added > CRA Doc. No E5(F) 20

11 ALLOCATION > Basic Rule > CRA proportionate share on per share basis > Nassau Walnut Investments > Gestation Jean Paul Champagne Inc. > Holding Period. 21 ALLOCATION > To Shares on a partial rollover? > Alberta Ltd. > Share exchanges > To fixed value preferred shares? - may not share in SIOH. 22

12 ALLOCATION > CRA Doc. No E5 > discretionary dividend shares > CRA Doc. No E5 > Share exchange under 51; old common for new common and prefs > pro rate safe income based on relative amounts of gain at time of exchange 23 RECENT LEGISLATIVE CHANGES > 53 (1) (b) 53 (2) (a) > PUC Increase typical transaction: Aco Aco FMV = $100 ACB = $1 PUC = $1 Safe Income = $30 PUC Increase of $30 FMV = $100 ACB = $31 PUC = $31 Safe income = $0 Opco Opco 24

13 RECENT LEGISLATIVE CHANGES > Stock dividend typical transaction: FMV = $100 ACB = $1 PUC = $1 Safe Income = $30 Aco Opco Stock Dividend - Preferred shares redeemable for $30, par value of $30 Aco Opco FMV = $100 ACB = $31 PUC = $31 Safe income = $0 25 RECENT LEGISLATIVE CHANGES > New consequences: > PUC increase > no ACB if direct or indirect conversion of contributed surplus; 53 (1) (b) > Stock dividend > no ACB > No adjustment to capital dividend account; 52 (3) (a) 26

14 FOREIGN AFFILIATES > 55 (5) (d) > Prior to August 19 > SI equal the amount that could be repatriated tax free on deemed disposition of all shares of FA at FMV > surplus/deficit consolidated > FA net deficits might be relevant in calculation 27 FOREIGN AFFILIATES > Post August 19 > Calculation changed > Tax Free Surplus Balance (TFSB) > TFSB is the safe income > TFSB is calculated affiliate by affiliate; determine net surplus at level of each FA; no vertical consolidation > S.I limitation of an FA is limited to the FMV of the Shares > Net deficits appear to go to FMV 28

15 INSUFFICIENT SAFE INCOME > Separate Dividends > 55 (5) (f) elections 29 ELIGIBLE DIVIDENDS > 89 (1) taxable dividend received by a resident paid after 2005 by a resident corp. and designated as such > capital dividends and capital gains dividends are not eligible 30

16 ELIGIBLE DIVIDENDS > CCPC can designate to the extent of GRIP > GRIP is reduced by amount of designated eligible dividends 31 ELIGIBLE DIVIDENDS > 55 (2) applied to designated dividend > GRIP decreased by the full amount of the designated dividends > No amount is added to the GRIP of the recipient > Ruling, CRA Doc. No E5 > partial solution 32

17 RESOURCES > Chapter 9 Taxation of Private Corporations > Pantry & Maclagan: > Issues and Updates Safe Income 2008 B.C. Conference Report > Brender, Mark: > Subsection 55 (2) Then and Now 2012 Conference Report >Slides are on website 33