Canada: Safe Income On Hand – Paying Tax Free Inter-Corporate Dividends – A Toronto Tax Lawyer Analysis

Last Updated: November 15 2018
Article by David Rotfleisch

Introduction – Tax Free Inter-Corporate Dividends

Under Canadian tax law, corporations are able to issue dividends to certain other Canadian corporations on a tax free basis. This can be accomplished through the use of s.112(1) of the Canadian Income Tax Act ("ITA") where the Canadian corporation that received a taxable dividend from another Canadian corporation is able to deduct an amount equal to that dividend from its income for that year, resulting in what is essentially a tax free transfer. However, a refundable Part IV tax may still apply on that dividend unless the two Canadian corporations are connected which requires that one of the corporations owns at least 10% of the shares of the other corporation and those shares are worth more than 10% of the fair market value of all issued shares of that other corporation, usually referred to as at least 10% of vote and value.

The general idea is that business is often conducted through various connected corporations and that the movement of funds between these corporations is often ultimately tax neutral to for the Canada Revenue Agency ("CRA"). The corporation that is paying the dividend typically earned it and has already paid corporate taxes on that dividend and when that money is eventually paid out to shareholders or employees, tax will be paid on that regardless of whether the it is the first corporation paying it out or a different corporation. As such, inter-corporate dividends are allows to flow tax free between connected corporations. To learn more about inter-corporate dividends call our top Toronto tax firm.

Capital Gains Stripping

However, these tax free inter-corporate dividends are also relevant when considering the sale of a corporation. A large part of the value of a profitable corporation will often be in its business assets, intangible property such as intellectual property or tangible property such as real estate or equipment. But, that same corporation may also have a substantial amount of retained earnings or cash reserves. When the shares of the corporation are sold, the seller is typically subject to a capital gain based on the increase in value of the shares which includes both the business assets as well as any cash it may have. In order to reduce that gain as much as possible, it is a common tax planning practice to utilize tax free inter-corporate dividends to remove as much of the cash as possible.

For example, consider a corporation with $1,000,000 in business assets and $300,000 in cash and the adjusted cost base of the shares was $1. Upon selling the shares, a capital gain of $1,299,999 would be realized and the taxable portion of that would be $649,999.50 which would be included in the seller's income for that year. However, if the cash is removed from the equation, the gain would accordingly drop to $999,999 and the taxable gain would be reduced to $499,999.50, saving something in the range of $75,000 in tax assuming a tax rate of 50% (approximate top marginal tax rate).

Safe Income

For income that has already been subject to corporate tax, this practice is not a problem. However, it is possible for a corporation to have cash that has not been subject to corporate tax. For example, that same business with $1,000,000 in business assets might get a $500,000 loan and then immediately transfer that by way of inter-corporate dividend. This would reduce the fair market value of the corporation accordingly and reduce the capital gain on sale to $499,999.5 and the taxable capital gain down to $249,999.75. Since that $500,000 came from a loan, it would not have been subject to corporate tax. In that case, anti-capital gains stripping provisions can apply to deem the amount that the offending inter-corporate dividend reduced the capital gains on the sale of the corporation to be proceeds of disposition and thus subject to a capital gain. As such, the after tax retained earnings of a corporation needs to be tracked and is referred to as safe income in this context.

Safe Income on Hand

However, just having enough safe income is not enough to safely issue the dividend. The safe income must also be on hand. The safe income on hand is the safe income earned during the relevant holding period that could reasonably be considered to contribute to the capital gain that would be realized on a disposition at fair market value of the share at that time. What that means is that if income has already been distributed previously as a dividend or used to pay taxes or a non-deductible expense, then it can no longer contribute to the fair market value of the share and thus is not considered to be on hand.

Tax Tip – Don't Wait until a Share Sale to calculate Safe Income on Hand

Not only is the concept of safe income on hand rather complicated, a sometimes unrecognized issue is that it cannot always be calculated when one is contemplating a share sale if it was not properly being tracked. This is because the safe income on hand is a running calculation from as far back as 1971 to present that needs to track all safe income earned and all relevant reductions of it to obtain the safe income on hand amounts. However, corporations will often not retain financial records for that back, so if one has not been keeping track of safe income, one's ability to minimize capital gains on the eventual sale of the shares may be reduced to only that amount that can be calculated from what records exist at that time. Corporations need to make sure that they are keeping proper track of these important tax attributes in order to take maximum advantage of available tax planning and tax mitigation strategies. Speak to one of our experienced Toronto tax lawyers and make sure you are doing everything you can to reduce your taxes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions