Safe income

You meet safe income when one corporation holds shares of another and a dividend is discussed before those shares are sold. The Income Tax Act describes the income in subsection 55(2.1) and fixes the point of measurement through the definition of safe-income determination time in subsection 55(1). It is a yardstick for the section 55(2) rule, not a rule on its own.

How the test uses it

Under subsection 55(2.1), one condition for subsection 55(2) to apply is that the dividend exceeds the income earned or realized by any corporation in that period which could reasonably be considered to contribute to the gain on the share. Other conditions must also be met, and subsection 55(3) lists exceptions. For certain stock dividends, subsection 55(2.3) deems, for the purpose of subsection 55(2), a separate taxable dividend to the extent of that income. The question of whether a large pre-sale dividend is a problem turns on it.

What to ask

• Who is calculating the figure, and from which financial records
• Whose income counts, since the Act refers to income of any corporation
• What the safe-income determination time is for this particular dividend
• Whether the dividend is a stock dividend, which has its own rule