Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Clarification on the calculation of ACB of a spin-off share for the purposes of subsection 86.1(3) of the Income Tax Act.
Position: Confirming the calculation shown in file #2002-0134537.
Reasons: As explained in file #2002-0134537.
XXXXXXXXXX 2003-018185
S. Leung
February 12, 2003
Dear XXXXXXXXXX:
Re: Adjusted Cost Base - Foreign Spin-Off Shares
We are writing in reply to your letter of November 14, 2002 in which you requested our clarification of certain points noted in an article printed by CCH Canadian Limited ("CCH") in its CCH Tax Window (Window on Canadian Tax Newsletter), Report No. 135, October 2002 (the "Article") with respect to the above-noted subject matter.
First, it should be clarified that the Article is not an exact replication of the document originated by the Canada Customs and Revenue Agency (the "CCRA"). The Document merely summarized and paraphrased a technical interpretation (file #2002-0134537) issued by the CCRA. Therefore, the CCRA is not responsible for its accuracy. For example, we note that a $ sign was inadvertently added before the figure "400" in two occasions in the Article as was pointed out by you.
To answer your questions, we confirm that the $42.50 figure used as the denominator in the formula to calculate the adjusted cost base ("ACB") of each quarter share of Yco is correct. It should not be $12.50 as suggested in your letter. The fair market value ("FMV") of one Xco share immediately after the distribution is $40, not $40 x 1/4. In other words, the total amount in the denominator of the formula is the FMV of one Xco share ($40) plus the FMV of one-quarter of one Yco share ($10 x 1/4 or $2.50) for a total of $42.50. The reason why one share of Xco instead of one-quarter share of Xco is used is because in the example provided in the Article, one-quarter of Yco share is received for one share of Xco held, not a quarter of Yco share for a quarter of Xco share held. Therefore, the ratio of the distribution is important in determining the ACB of the spin-off share (Yco share) and the original share (Xco share).
With respect to your question of who decides whether a particular spin-off share is to be considered a whole share spin-off or a one-quarter share spin-off for the purposes of subsection 86.1(3) of the Income Tax Act, the answer lies in the number of the spin-off shares received for each original share held by the taxpayer. In the example provided in the Article, since a quarter of a spin-off share is distributed to the taxpayer for each original share held, the "FMV of the spin-off share" to be used in the formula to calculate ACB of each quarter of the spin-off share is therefore the FMV of one-quarter of the spin-off share (which is $2.50 in that example).
We trust you will find the above to be of assistance.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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