9 September 1993 Income Tax Severed Letter 9315025 - Deemed Dividend—Stock Divestiture

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.

                                           5-931502
XXXXXXXXXX                                 G. Middleton
                                           (613) 957-2122

Attention: XXXXXXXXXX

September 9, 1993

Dear Sir:

This is in reply to your letter of May 4, 1993 in which you requested our views on the tax consequences to Canadian resident shareholders in the following circumstances.

A U.S. public company ("Co. A") holds shares in another public company ("Co. B"). Co. A divests itself of the shares it owns in Co. B to the Co. A shareholders on a pro- rata basis. The shareholders of Co. A will retain the Co. A shares and the original share certificates and they will receive, pro-rata, shares and share certificates in Co. B.

This divestiture (spin-off) is a distribution by Co. A of property owned by it to its shareholders on a pro-rata basis. Such a distribution is a dividend whether or not the property distributed is cash or other assets of Co. A. In Co. A's case, the property distributed was shares of Co. B which were held by Co. A.

The Income Tax Act requires a Canadian resident shareholder to include in income the amount of a dividend received. In the case of the Co. A divestiture, the amount of the dividend is the fair market value of the share(s) of Co. B on the date those share(s) are received by shareholders of Co. A. The Co. B shares, that represent a dividend received by a shareholder of Co. A, will have a cost to the shareholder equal to the fair market value of the Co. B shares on such date. The adjusted cost base of the shares of Co. A will not change as a result of the divestiture.

With respect to the American Telephone and Telegraph ("AT & T") divestiture of January 1, 1984, the tax consequences for Canadian shareholders were the same as above. However, in the Department of Finance Release of April 4, 1985, Michael Wilson, the former Minister of Finance, announced that he was sponsoring a remission order under section 17 of the Financial Administration Act in respect of the tax treatment of Canadian resident shareholders as a result of the AT & T divestiture. The remission was granted on May 15, 1985 PC 1985-1476. We are enclosing a copy of the remission order and the Finance Release. As indicated in the Finance Release, one of the main reasons for recommending the remission was due to the fact that a U.S. court ordered the AT & T divestiture which made it an involuntary divestiture. It is our understanding that remission requests involving voluntary divestitures have not been granted.

We trust our comments will be of assistance to you.

Yours truly,

for Director Reorganization and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch