22 January 1997 External T.I. 9701295 - Dividend in kind - U.S. 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.

Principal Issues:

Taxability of dividend in kind where U.S. Corporation divestiture to a Canadian shareholder

Position:

No deferral under Act and is taxable dividend

Reasons:

Subsection 52(2) and section 90 and meaning of dividend

						970129
XXXXXXXXXX						J. Stalker

Attention: XXXXXXXXXX

January 22, 1997

Dear Sirs:

Re: Dividends in Kind

We are writing in response to your letter of January 8, 1997 and in followup to our telephone conversation of January 20, 1997 (Major/XXXXXXXXXX) in respect of a stock distribution of XXXXXXXXXX.

We offer the following comments which we hope will be of assistance to you. The distribution by XXXXXXXXXX of property owned by it to its shareholders on a pro-rata basis is a dividend, whether or not the property distributed is cash or other assets of XXXXXXXXXX. Unlike the U.S. Internal Revenue Code, the Income Tax Act (Canada) (the "Act") does not provide for a tax deferral with respect to such a dividend and requires a Canadian shareholder to include in income the amount of the dividend received. Pursuant to subsection 52(2) and section 90 of the Act, the amount of the dividend to be included in income is the aggregate of the fair market value of the shares of XXXXXXXXXX on the date those shares are transferred to shareholders of XXXXXXXXXX and any cash received in lieu of fractional shares of XXXXXXXXXX. The adjusted cost base of the shares of XXXXXXXXXX will not change as a result of the distribution.

You have also forwarded an excerpt from a letter from one of your customers who is of the opinion that a dividend in kind is not taxable, apparently based on the argument that it is not a stock dividend. We agree that this distribution is not a stock dividend within the meaning of the Act. However, it is a dividend that happens to have been paid in property that is shares.

As subsection 248(1) of the Act generally defines a dividend as including a stock dividend, but does not go beyond that, we must look to the accepted ordinary meaning of the term for purposes of the Act. Generally, it is our view that a dividend can include any pro rata distribution of property by a corporation to its shareholders that is not a return of the paid-up capital of a corporation. For this purpose, it does not matter whether the corporation making the distribution is a Canadian resident or not. We find support for this position in Cangro Resources Limited (In Liquidation) v. Minister of National Revenue, 67 DTC 582.

We also note that your customer's reliance on IT-432R and subsection 15(1) of the Act as support for his or her view that the dividend in kind is not includible in income is not appropriate. Furthermore, paragraph (b) of subsection 15(1) specifically excludes dividends from the ambit of subsection 15(1) since they are included in income elsewhere in the Act.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations Directorate