15 October 1997 External T.I. 9724475 - DIVIDEND IN KIND-FOREIGN SPIN-OFFS

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:

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?

Position:

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

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.

972447
XXXXXXXXXX J. Stalker

Attention: XXXXXXXXXX

October 15, 1997

Dear Sirs:

Re: Spin Offs by Foreign Corporations

We are writing in response to your letter of June 15, 1997 which we received on September 12, 1997 in respect of the tax consequences to Canadian shareholders of several stock distributions. You are concerned with the following "spin-offs":

XXXXXXXXXX

We have reviewed the material you have provided in respect of the above-noted spin-offs. In each case, it was determined that the spin-off was a distribution of property owned by the particular corporation, that is shares of another corporation, to its shareholders on a pro-rata basis. As such a distribution is a dividend, any Canadian shareholder who held shares of XXXXXXXXXX during the respective spin-offs has received a dividend which is subject to Canadian income tax. 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.

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.

The tax consequences to Canadian shareholders of XXXXXXXXXX would be the same as in the example.

We note that 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 stated above, the Act does not provide for any kind of deferral with respect to such a dividend.

You have also enquired about the tax consequences to Canadian shareholders of the reorganization of XXXXXXXXXX. As discussed with you on September 16, 1997, XXXXXXXXXX is a Canadian corporation and the transactions were carried out differently from the spin-offs discussed above, so that there were no dividends of any of the assets of XXXXXXXXXX to its shareholders. Instead, there was a share for share exchange at the shareholder level. As the tax consequences to Canadian shareholders may vary from shareholder to shareholder, we cannot comment without further information. We suggest that the potential tax consequences to the Canadian shareholders of XXXXXXXXXX would likely be explained in the Information Circular given to XXXXXXXXXX shareholders referred to in the information you have provided. If you wish further guidance on the tax consequences please provide us with a copy of that Circular.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch