4 July 2001 External T.I. 2001-0084025 - Foreign Spin-offs (General)

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

General information requested on new foreign spin-off rules. Inquiry subsequently withdrawn.

Position:

Files closed. Taxpayer notified. General comments given.

Reasons: Taxpayer received the information he needed subsequent to his initial contact with us.

		2001-008402
XXXXXXXXXX 	2001-008430
		Jim Wilson
July 4, 2001

Dear XXXXXXXXXX:

Re: Foreign Spin-Offs

This is in reply to your letter of May 28, 2001, in which you withdrew your requests made in your letters of February 21 and March 12, 2001 for a ruling with respect to two separate foreign spin-offs. We understand that you have now received the information you need regarding the tax treatment in Canada of these transactions. We apologize for any confusion or frustration that you have had to tolerate as a result of the new rules pertaining to foreign spin-offs. In case you have not received all the necessary information, we have added a few comments below which may be of assistance.

Comments

Generally, the fair market value of the shares received by a Canadian shareholder in the course of a foreign corporate spin-off is included in the income of that shareholder at the time the shares are received. However, new legislation (S.C. 2001, c. 17, in force as of June 14, 2001) has amended the Income Tax Act (the "Act") to add section 86.1 pertaining to the tax treatment of foreign spin-offs. Section 86.1 of the Act provides for the tax-deferred receipt of such distributed shares by a Canadian shareholder only if all of the following conditions described in section 86.1 are met:

• The distribution results from common shares of the distributing corporation (original shares) owned by the taxpayer.
• The distribution to the taxpayer consists solely of common shares of a corporation (spin-off corporation) owned by the distributing corporation (there can be no non-share consideration).
• Both the distributing corporation and the spin-off corporation are resident in the same country at the time of distribution and have never been resident in Canada.
• The original shares represent a class of shares that are widely held and actively traded on a prescribed stock exchange.
• The distribution is not taxable to shareholders resident in the country in which the distributing corporation is resident.
• The distributing corporation provides certain information to the Canada Customs and Revenue Agency (the "CCRA") within six months of the distribution, including, the type and fair market value of the property distributed, and the names and addresses of Canadian taxpayers that received distributed property.
• The taxpayer files a special election in the income tax return for the year in which the distribution takes place to have the rollover provision apply to the distribution.

As noted above, one of the requirements, in order for a foreign spin-off to occur on a tax-deferred basis, is that the distributing corporation must provide to the CCRA certain information, including the name and address of each resident of Canada who received property with respect to the distribution. It is the responsibility of the Canadian shareholder to contact the foreign distributing corporation to ensure that it has provided the CCRA with the required information. Once the Canadian shareholder has confirmed with the distributing corporation that the distributing corporation has met the requirements in section 86.1 of the Act, the Canadian shareholder may make an election to defer the tax arising on the receipt of the distributed shares.

It would appear that you have already obtained a copy of the Questions and Answers prepared by the CCRA regarding the CCRA's administration of the new legislation with respect to foreign spin-offs. If you have not, an electronic version of this document can be obtained at www.ccra-adrc.gc.ca/tax/business/taxtopics/foreign-e.html.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch