Safe Income And The Calculation Of The Safe Income Determination Time

Safe Income And The Calculation Of The Safe Income Determination Time



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Amendments to section 55(2) of the Income Tax Act (IT) greatly broadened the reach of subsection 55(2) primarily due to the  addition of two new purpose tests and the restriction of the paragraph 55(3)(a) related party exception to only subsection 84(2) or (3) deemed dividends.  This article deals with the safe income exception in paragraph  55(2.1)(c) which is the only objective safe harbour in dealing with revised subsection 55(2).   [1]

The Safe Income On Hand Exception

The underlying concept of safe income is that once corporate income has been taxed, corporations should be able to pass that income amongst themselves on a tax‐deferred basis (subject to Part IV tax).  Accordingly, paragraph 55(2.1)(c) provides that a dividend is not subject to subsection 55(2) if the amount of the dividend does not exceed an amount that is:


  • the income earned or realized by any corporation, after 1971 and before the safe‐income  determination time (SIDT) for the series, and,
  • that could reasonably be considered to contribute to the shareholder’s hypothetical capital gain  on the share from which the dividend is received, at the moment immediately before the  dividend.


The first part, the “income earned or realized by any corporation …” is often referred to as “safe  income”, and this amount represents corporate income that has been subject to tax, modified by  adjustments in paragraphs 55(5)(b), (c) and (d). The second part, the amount of safe income that must reasonably be considered to contribute to a  hypothetical capital gain, is often referred to as the “safe income on hand” or “SIOH” – being the safe  income that needs to remain “on hand” in order to contribute to a gain.  Income earned or realized that  is no longer on hand to reasonably contribute to a hypothetical capital gain cannot protect a dividend  against subsection 55(2).   Whether a capital gain could reasonably be considered to be “attributable” to safe income is arguably substantially the same as whether an amount of safe income can reasonably “contribute” to a capital  gain.


Prior to the  amendments, paragraph 55(5)(f) allowed the filing of a designation to carve a single dividend into a  series of smaller dividends, in order to protect against subsection 55(2) re‐characterizing an entire  dividend if SIOH happens to be less than the total amount of the dividend. Due to the amendments, paragraph 55(5)(f) applies automatically to split a dividend that exceeds SIOH into two separate  dividends: a dividend equal to the amount of the SIOH, and another dividend equal to the remainder.  The former is protected by the safe income exception; the latter is subject to re‐characterization under  subsection 55(2) if one of the purpose tests in paragraph 55(2.1)(b) is met.


 Relevant period for calculating safe income: when to begin and when to end    

Starting point – acquisition date

A gain on a share cannot arise before acquisition of the share, and only  corporate earnings that arise after the acquisition could reasonably be considered to contribute to the  shareholder’s hypothetical capital gain on the share. Because of this, safe income is generally  determined for a period that begins with the time of acquisition of the share, to the extent that  acquisition date is after 1971. Therefore, no safe income dividend can be paid immediately after an  acquisition even if SIOH was available immediately prior to the acquisition. Conceptually, any corporate  earnings that were on hand prior to acquisition should form part of the shareholder’s purchase price  and therefore adjusted cost base (ACB) of the share.


Starting point – tax‐deferred acquisition 

There are a number of exceptions to the general rule discussed above; the most common being where a  share is acquired by the shareholder on a tax‐deferred share exchange. In a situation where a share is  acquired on a fully tax‐deferred share exchange (either under sections 51, 85, 85.1, 86 or 87), the SIOH  of the old share flows to the new share. This is a reasonable result since the entire accrued gain is  transferred to the new share, and accordingly the income earned or realized prior to the acquisition (to  the extent it reasonably contribute to a hypothetical capital gain of the old share at the time of the  exchange) should reasonably be considered to contribute to the hypothetical capital gain of the new  share immediately after the exchange. Of course, this also means that the amount of SIOH inherited can  never exceed the amount of hypothetical capital gain of the old share at the time of the exchange.  This concept applies similarly to share mergers and splits. Where a shareholder exchanges, on a fully  tax‐deferred basis, two classes of old shares for one new class, the SIOH of the two classes will flow  through to the one class.  Conversely, where a shareholder exchanges one class of old shares for two  classes of new shares, the SIOH of the old class flows to the two new classes, allocated pro rata based on  the relative amounts of the inherent gain of the two new classes at the time of the exchange.



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Ending point for calculation – safe income determination time 

Paragraph 55(2.1)(c) specifies that the relevant period for computing SIOH ends before the “safe‐income  determination time for the transaction, event or series…”. The term safe‐income determination time  (SIDT) for a transaction or a series is defined under subsection 55(1), and it is generally the earlier of the  time that is


1) immediately before the earliest dividend paid as part of the series; and


2) immediately after the earliest of certain dispositions or increase in interests described in  subparagraphs 55(3)(a)(i) through (v) that resulted from the series.


The challenge of dealing with this definition in practice is its reference to a “series”. The concept of a  "series of transactions or events" has been defined very broadly by the courts, and this broad definition is further expanded by subsection 248(10). Under the common law, transactions can constitute a  “series” if the transactions are pre‐ordained in order to produce a given result, and there is no practical  likelihood that the pre‐planned events would not take place in the order ordained.  Subsection 248(10)  then expands the meaning to deem a series of transactions or events to include "any related  transactions or events completed in contemplation of the series". In interpreting subsection 248(10), the  Supreme Court of Canada in Canada Trustco stated that "in contemplation" is read not just in the sense  of actual knowledge but also in the broader sense of "because of" or "in relation to" the series, and it  can apply to events before or after.  Later, in Copthorne Holdings Ltd. v R, the Supreme Court of Canada  clarified that the "because of" or "in relation to" tests do not require a strong nexus, but requires more  than a "mere possibility" or a connection with "an extreme degree of remoteness".


The Court in Copthorne also confirmed that a subsection 248(10) series allows either a prospective or retrospective  connection of a transaction related to a common‐law series.  Given the expanded definition of “series” in subsection 248(10) and the broad interpretations by the  Courts, one must be cautious of historical events in computing SIOH. It should also be noted  that there is no minimum amount for an event to qualify as a triggering event for SIDT. A  taxpayer paying a significant inter‐corporate dividend believing itself to be entitled to a certain amount  of SIOH could be blind‐sided if it is unaware that an immaterial historical dividend or transaction  described in subparagraphs 55(3)(a)(i) through (v) was part of or resulted from the same series as the  dividend.  Once an event triggers a SIDT, any income earned or realized after the SIDT cannot be included  in SIOH.


The CRA announced in 2016 that it generally does not view regular, recurring  annual dividends to be part of a series of transactions.  As a result, the SIDT in respect of each of the  annual dividends occurs immediately before each such dividend, meaning that each dividend can take  into account the SIOH accumulated up to that point.



If you have any questions or want to speak further about your corporation, contact Nicholas Kilpatrick at


Nicholas Kilpatrick is a partner with the accounting firm of  Burgess Kilpatrick and specializes in tax structuring and business development for his small and medium business sized clients.  Please visit our website at or on Facebook at Kilpatrick for more information on our firm.  This article has been paraphrased from an article by Kenneth Keung of Moody’s Gardner Tax Law LLP.




[1] Kenneth Keung, CA TEP, Moody’s Gardner Tax Law LLP, Canadian Tax Foundation Prairies Conference.

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