19 August 2009 External T.I. 2009-0326271E5 - Corporate Restructuring

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" under 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 							2008-032627
								Andrea Boyle, CGA
August 19, 2009

Dear XXXXXXXXXX :

Re: Corporate Restructuring

This is in response to your letter of June 2, 2009 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 that you received in XXXXXXXXXX .

You indicated in your letter that you are a shareholder of XXXXXXXXXX which divided its business XXXXXXXXXX . The separation occurred through distributions to XXXXXXXXXX shareholders of all the common shares of XXXXXXXXXX new corporations on a pro rata basis. Following the distribution of the common shares of the new corporations, you received a T5 Statement of Investment Income from your broker.

It is our understanding that XXXXXXXXXX trades on the XXXXXXXXXX Stock Exchange, however, XXXXXXXXXX and the new corporations are resident in XXXXXXXXXX .

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.

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").

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 included in the shareholder's income unless the distribution meets the requirements for exclusion from income under section 86.1.

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 whose shares are distributed must be resident in the same country and that country must be either the United States or another 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 new corporations received on the distribution by a Canadian resident shareholder is required to be included in computing that shareholder's income for Canadian tax purposes. The fair market value of the shares received should therefore be reflected in the T5 Statement of Investment Income issued to that shareholder.

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