Safe income is the retained earnings of a corporation, computed for tax purposes, that can reasonably be considered to contribute to the accrued gain on a share. The concept is central to section 55(2) of the Income Tax Act, which can convert an otherwise tax-free intercorporate dividend into a capital gain where the dividend exceeds the safe income attributable to the share and is part of a series that reduces a share's value or increases a cost.
Dividends paid out of safe income generally remain tax-free between connected corporations, while dividends in excess of safe income can be recharacterized. Calculating safe income on hand is technical: it requires tracing income earned and on hand since the share was acquired, with numerous adjustments. The analysis is a routine and important step in any reorganization that moves dividends between related corporations.