25 March 2008 External T.I. 2008-0271141E5 - Foreign Spin-off

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.

Principal Issues: Whether a spin-off by a non-resident corporation qualifies as an "eligible distribution" within the meaning of subsection 86.1(2) of the Act.

Position: No.

Reasons: The distribution of shares does not satisfy the requirements of subsection 86.1(2) of the Act.

								2008-027114
XXXXXXXXXX 							A. Seidel, CMA
(613) 957-2058
March 25, 2008 

Dear XXXXXXXXXX :

Re: Corporate Reorganization

This is in response to your March 10, 2008 e-mail in which you requested our comments as to whether certain shares of a foreign corporation received by you in 2007 in the course of a corporate spin-off were received on an "eligible distribution" within the meaning of subsection 86.1(2) of the Income Tax Act (the "Act").

Background

You indicated in your e-mail that you are a shareholder of a corporation ("Opco") that is resident in XXXXXXXXXX and that Opco "spun off" two of its businesses in 2007. The spin-off included the transfer of parts of Opco's existing business to two new corporations (the "Newcos") resident in XXXXXXXXXX and the distribution of the shares of the Newcos to Opco's shareholders on a pro rata basis. In accordance with the Income Tax Regulations, Opco issued a T5 Statement of Investment Income ("T5") to you in respect of the spin-off. You query whether the amounts on the T5 are required to be included in computing your income or whether the foreign spin-off rule in section 86.1 of the Act applies such that these amounts are not required to be included in your income.

Our Comments

The situation outlined in your letter relates to completed transactions involving a specific taxpayer. It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to provide the following general comments.

For purposes of the Act, a pro rata distribution of property (other than money) by a non-resident corporation to its shareholders would normally be treated as a dividend-in-kind. Under the Act, the fair market value of the property received as a dividend-in-kind by a Canadian resident shareholder from a non-resident corporation is, subject to section 86.1, included in the shareholder's income.

Section 86.1 of the Act provides that an amount received on a distribution is not included in the shareholder's income where the distribution involves shares of the capital stock of another corporation and the distribution qualifies as an "eligible distribution" as described in subsection 86.1(2) of the Act. To qualify as an eligible distribution, a dividend-in-kind must be in respect of all the shareholder's common shares of the distributing corporation and must consist solely of common shares of the capital stock of another corporation that were owned by the distributing corporation immediately before the distribution. In addition, both the distributing corporation and the corporation(s) whose shares are distributed must be resident in the United States or resident in the same country with which Canada has a tax treaty.

With respect to the distribution described in your email, we note that XXXXXXXXXX is not a country with which Canada has a tax treaty and, therefore, the distribution cannot qualify as an eligible distribution. Accordingly, the fair market value of the shares of each of the Newcos received on the distribution by a Canadian resident shareholder (which should be reflected in the T5 issued to that shareholder) is required to be included in computing that shareholder's income for Canadian tax purposes.

We trust these comments will be of assistance.

Yours truly,

Daryl Boychuk
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch