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: Can a distribution of common shares with rights attached to them come within the meaning of a distribution that consists solely of common shares for purposes of section 86.1 of the Act?
Position: No. We are willing to look into this issue in more depth if we receive a live file to review, however.
Reasons: We generally take the position that a share right is a property distinct from the share. So if the share right is created before the distribution such that the right is distributed along with the share, we do not see how it can be said that the distribution consists "solely" of common shares. The situation may be slightly different for rollover provisions other than s. 86.1; the wording of such provisions may allow us more flexibility with respect to share rights as non-share consideration. Again, we need to see a "live" file before we change our basic position.
XXXXXXXXXX 2002-012266
Eliza Erskine
Attention: XXXXXXXXXX
June 5, 2002
Dear Sirs:
Re: Application of Section 86.1 of the Income Tax Act (the "Act") to a Distribution of Common Shares with Rights Attached
This is in reply to your letter to us of February 8, 2002, to which you attached a submission setting out your concerns regarding our current position on the issue of whether section 86.1 of the Act can apply to a distribution of common shares where there are rights attached to the distributed shares. At the time that we received your correspondence, we understood from XXXXXXXXXX (telephone conversation of February 20, 2002, XXXXXXXXXX/Erskine), that you did not expect a written response from us commenting on your submission, however, we understand that you have recently changed your mind (telephone conversation of May 2002, Biscaro/XXXXXXXXXX) and we are therefore responding accordingly.
As you are aware, section 86.1 of the Act provides a potential tax deferral to a Canadian resident shareholder of a foreign corporation, where that foreign corporation makes a distribution in kind of shares that it owns of a second foreign corporation. In effect, the first foreign corporation transfers its ownership interest in the second foreign corporation to its own shareholders. This is commonly referred to as a "spin-off" transaction.
In order to qualify for the tax deferral, the distribution must be an "eligible distribution" as defined in section 86.1 of the Act. Among other requirements, to qualify as an "eligible distribution" the distribution must consist "solely of common shares of the capital stock of another corporation" that were owned by the distributing corporation immediately before their distribution to the taxpayer. The Canada Customs and Revenue Agency (the "CCRA") has recently been considering whether or not section 86.1 of the Act can apply to a distribution of common shares with attached shareholder rights under a shareholders rights plan of the kind often referred to as a "poison pill" rights plan. We understand that a large number of U.S. public corporations whose shares have been distributed in typical "spin-off" distributions have put in place shareholder rights plans (which duplicate the shareholder rights plan in place with respect to the distributing U.S. corporation) immediately before the "spin-off" transaction.
The issue that you raise in your submission, and which has also been raised with us at recent conferences and in telephone inquiries, is whether a distribution of common shares with rights attached to them can come within the meaning of a distribution that consists solely of common shares. The CCRA's current position is that the receipt of rights under a shareholder rights plan means that such a distribution consists of something other than common shares and is therefore not an "eligible distribution" under section 86.1 of the Act. This means that the Canadian shareholders of the distributing corporation are not entitled to elect for the tax deferral provided by section 86.1 of Act. We understand that this position is of concern to you, and that you are especially concerned in light of the potential implications of this position with respect to other Canadian rollovers. We understand that a substantial number of Canadian corporations have shareholders rights plans in place at the present time.
To date, the Income Tax Rulings Directorate ("Rulings") has not received any requests for binding advance income tax rulings with respect to whether a foreign spin-off that includes a distribution of rights pursuant to a typical shareholder rights plan can qualify as an "eligible distribution". This means that we have not had the opportunity to review taxpayers' and tax practitioners' submissions on this issue in the context of a particular shareholder rights plan and a particular foreign spin-off. As was explained at the International Fiscal Association seminar in Toronto on May 13, 2002, the CCRA does not intend to establish an administrative position with respect to this issue. We are concerned that there is no legal basis for such a position, given the restrictive nature of the words used in section 86.1 of the Act. In our view, the words used in section 86.1 suggest that the policy underlying the provision was that foreign spin-offs involving the distribution of anything other than common shares were not intended to benefit from the tax deferral provided. We note that as section 86.1 of the Act clearly contemplates that property other than common shares could be distributed as part of a particular foreign spin-off, and as it appears that the mere existence of such property prevents the foreign spin-off from being an "eligible distribution", the value of such property, whether nominal or not, is not relevant in the context of this provision.
In our view, in order to consider a particular foreign spin-off that includes rights under a shareholder rights plan to be an "eligible distribution", the CCRA will require legal support that either
(i) the particular "poison pill rights" are not property separate from the common shares being distributed; or
(ii) the issuance of the rights is not part of the particular distribution.
Our initial reaction to these arguments is that "poison pill rights" probably do constitute property separate from the common shares and that such rights are part of a particular distribution where the shareholder rights plan is put in place prior to the distribution. We plan to seek legal advice on these issues once we have a live file to review. We strongly recommend that anyone who has a client who will be receiving share rights pursuant to a particular foreign spin-off consider requesting an advance income tax ruling on the application of section 86.1 of the Act. We would give high priority to any such ruling request.
We understand that your submission is concerned with domestic rollover provisions as well as (or perhaps even more than) the section 86.1 foreign spin-off rules. We acknowledge that although the wording of section 86.1 of the Act is slightly different than that in other rollover provisions in the Act that require that only share consideration be received by the taxpayer (for example, subsections 51(1), 85.1(1) and 87(4) of the Act), any final position we take on this matter may have an impact on our interpretation of such provisions. However, after significant internal consultations among international taxation and corporate reorganizations Income Tax Rulings staff and management, we are not satisfied that it is appropriate for us to comment in detail at this time on the arguments raised in your submission with respect to either section 86.1 of the Act or other provisions of the Act that might be implicated by our interpretation of section 86.1 of the Act. We strongly recommend that anyone who has a client who will be receiving share rights in the course of a particular reorganization involving one of the domestic rollover provisions described above (i.e., that requires that no non-share consideration be received by the taxpayer), consider requesting an advance income tax ruling. Again, we would give high priority to any such ruling request.
In conclusion, we will not provide any kind of administrative exception for "poison pill"-type share rights in the context of section 86.1 of the Act, nor will we seek legal advice on this matter, until we have a live file to review that sets out all of the relevant facts of the foreign spin-off and includes a copy of the shareholder rights plan in question. Although we appreciate your submission on this issue, it has not convinced us that share rights issued in the context of a foreign spin-off are not property separate from the related common shares. There are a number of issues to clarify before we could accept such an argument. Also, we would want to understand why, in the context of a spin-off transaction, the share rights plan has to be created immediately before the distribution.
We trust that our comments will be of assistance to you. You are welcome to contact us if you require further clarification of our current position with respect to the issues discussed in this letter.
Yours truly,
Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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