28 July 1997 External T.I. 9706165 - DIVIDEND IN KIND - U.S. 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.

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:

1) What are the tax consequences to a Canadian shareholder as a result of a U.S. spin-off (or divestiture) where stock of subsidiaries is distributed to shareholders of XXXXXXXXXX?

2) Is there any special treatment available for Canadian shareholders?

Position:

1) Dividend to the Canadian shareholder, equal to the fair market value of the distributed shares at the time they are received.

2) No. Finance has only granted one remission order in respect of a 1984 divestiture by AT&T, which was court ordered. Finance indicated that the main reason for that remission order was that it was involuntary. No remission orders have been granted for voluntary spin-offs.

Reasons:

Pro-rata distribution of property to shareholders which would be taxed as a dividend in the U.S. but for specific deferral provisions in the U.S. tax law. No such provisions in the Act.

                                   	 							970616
XXXXXXXXXX                                 J. Stalker

Attention: XXXXXXXXXX

July 28, 1997

Dear Sirs:

Re: Share Allocation ("Spin-off") by XXXXXXXXXX

We are writing in response to your letter of March 4, 1997 and in follow-up to our telephone conversation of March 5, 1997 (Major/XXXXXXXXXX) in respect of two stock distributions or share allocations by XXXXXXXXXX which took place in XXXXXXXXXX.

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 ofXXXXXXXXXX. 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 distributed on the date those shares are transferred to shareholders of XXXXXXXXXX and any cash received in lieu of fractional shares. The adjusted cost base of the shares of XXXXXXXXXX will not change as a result of the distribution.

For example, XXXXXXXXXX distributed shares of XXXXXXXXXX on a pro-rata basis to its shareholders. The shareholders also retained their existing shares of XXXXXXXXXX. The distribution was a payment of a dividend in kind of the shares of XXXXXXXXXX which is taxable to Canadian shareholders of XXXXXXXXXX.

The amount of the dividend to a Canadian shareholder of XXXXXXXXXX is the aggregate of the fair market value of the shares of XXXXXXXXXX received by the shareholder and any cash received in lieu of fractional shares. The XXXXXXXXXX shares received by the shareholder will then have a cost base equal to the amount of the dividend included in the income of the shareholder. The cost of the shares of XXXXXXXXXX will not change as a result of the spin-off.

We note that we have reviewed several U.S. spin-offs (also called "divestitures"), including those by XXXXXXXXXX, and in each case the distribution of the shares as a result of such a spin-off would be taxed as a dividend in the United States except that the transaction has fallen within specific deferral provisions of the U.S. Internal Revenue Code. However, as noted above, the Act does not provide for any kind of deferral with respect to such a dividend.

The Department of Finance is fully apprised of the tax consequences of spin-offs. In some cases, the Department of Finance has been requested to grant a remission order to relieve the resulting tax consequences to Canadians. However, only one remission order has been granted in respect of a spin-off. On May 15, 1985, the Department of Finance granted a remission order in respect of the January 1, 1984 spin-off by AT&T. The accompanying Finance Release indicated that one of the main reasons for recommending the remission order was the fact that a U.S. court ordered the AT&T spin-off which made it an involuntary spin-off. Remission requests involving voluntary divestures, such as those described above, have not been granted.

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 Foreign Division
Income Tax Rulings and Interpretations Directorate