From Henry Shew, “Safe Income May Vary Within Shares of the Same Class” 8:3 Cdn Tax Focus (August 2018):
Assume that Holdco purchases 100 shares of Opco for $10 (“the old shares”). These shares earn $1 per share of safe income per year. Therefore, at the end of year 1, Holdco has $100 of safe income on hand. at the beginning of year 2, Holdco purchases another 100 shares of Opco (“the new shares”) for $10. These shares also earn $1 per share of safe income per year. Therefore, at the end of year 2, Holdco should have $300 of safe income on hand in total ($100 of safe income earned in year 1 plus $200 of safe income earned in year 2).
Opco then proceeds to pay an intercorporate dividend of $1.25 per share, for a total dividend of $250 (200 × $1.25). It might seem that subsection 55(2) will not apply because the dividends are less than the safe income ($250 < $300), but this is not the case. for the old shares, Holdco has $200 of safe income (100 × ($1 + $1)) and $125 of dividends (100 × $1.25). On the new shares, however, Holdco has the same $125 (100 × $1.25) of dividends, but only $100 of safe income (100 × $1). Therefore, subsection 55(2) applies to recharacterize $25 of the dividends on the new shares.
