9 March 1998 External T.I. 9804395 - 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.

		                                                                  						980439
XXXXXXXXXX 	                                                                 		J. Stalker

March 9, 1998

Dear XXXXXXXXXX:

Re: Spin-Offs by Foreign Corporations

We are writing in response to facsimile transmission of February 20, 1998 in respect of the tax consequences to Canadian shareholders of several stock distributions. You are concerned with the following "spin-offs":

(i) the distribution by XXXXXXXXXX

(ii) the distribution by XXXXXXXXXX

(iii) the distribution by XXXXXXXXXX

(iv) the distribution by XXXXXXXXXX

(v) the distribution by XXXXXXXXXX

We have reviewed the shareholder information in respect of the spin-offs by XXXXXXXXXX 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, on XXXXXXXXXX distributed shares 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 an adjusted cost base equal to the amount of the dividend included in the income of the shareholder. The adjusted cost base 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. As we do not have information on the distributions by XXXXXXXXXX, we can not confirm the tax treatment of Canadian shareholders; however, if the transactions are substantially the same as the above spin-offs, the tax consequences would also be the same as in the example.

You have asked specifically if the XXXXXXXXXX spin-off would have different tax consequences because so much value was paid out to the shareholders. Our review showed that the XXXXXXXXXX spin-off was structured in the same manner as the other spin-offs we have reviewed. Consequently, unlike the U.S. rules which we understand provide for an allocation of the original cost basis of the XXXXXXXXXX shares to the shares received of XXXXXXXXXX, a Canadian shareholder will retain the original cost basis of the XXXXXXXXXX shares. The Canadian shareholder has received dividends equal to the fair market value of the shares of XXXXXXXXXX received, and the adjusted cost bases of those shares will be equal to the amount of the dividends.

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.

Yours truly,

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

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