29 January 2009 External T.I. 2008-0285911E5 - 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.

XXXXXXXXXX 								2008-028591
I. Landry, LL.B, M. Fisc.
January 29, 2009

Dear XXXXXXXXXX :

Re: Taxation of Stock Shares Dividend

This is in response to your letter of June 15, 2008 in which you requested our comments on the requirement to include in your income an amount equal to the value of certain shares of foreign corporations you have received in XXXXXXXXXX

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You indicated in your letter that you are a shareholder of a corporation ("XXXXXXXXXX ") that divided its business in XXXXXXXXXX independent corporations in XXXXXXXXXX . The separation occurred through distributions to XXXXXXXXXX 's shareholders of all the commons shares of XXXXXXXXXX new corporations (the "Newcos") on a pro rata basis. Following the distribution of common shares of the Newcos, you received a T5 Statement of Investment Income ("T5") from your bank. It is our understanding that XXXXXXXXXX trades on the XXXXXXXXXX Stock Exchange, however, XXXXXXXXXX and the Newcos are resident in XXXXXXXXXX .

Our Comments

The situation outlined in your letter relates to completed transactions involving a specific taxpayer. As explained in Information Circular 70-6R5, 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. For situations involving completed transactions, all relevant facts and documentation should be submitted to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

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.

Subsection 86.1 (1) 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). 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 letter, 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,

Louise J. Roy, CGA
Manager
For acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch