7 January 1999 External T.I. 9834035 - XXXXXXXXXX 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.

XXXXXXXXXX 		983403

January 7, 1999

Dear XXXXXXXXXX:

We are writing in response to your letter of December 18, 1998 and your telephone conversation on December 20, 1998 with Mr. Ken Major of the International Section of the Income Tax Rulings and Interpretations Directorate, regarding the spin-off by XXXXXXXXXX of its subsidiary XXXXXXXXXX to its shareholders.

We would like to assure you that the points set out in your December 18, 1998 letter were taken under consideration in determining the Canadian tax consequences of this spin-off to the Canadian shareholders of XXXXXXXXXX. As discussed in the telephone conversation with Mr. Major, those tax consequences were explained to you in our letter to you of December 7, 1998.

In particular, you comment that the XXXXXXXXXX shares were already taxed as income when the XXXXXXXXXX shares were purchased and vested. However, that tax was on the taxable benefit you received on the shares that vested to you. Instead of using your own cash to buy all the shares, you were assisted by your employer which resulted in a taxable benefit included in your remuneration. The end result is that you are in the same position as some other investor who has used all their own after-tax cash to buy shares of XXXXXXXXXX. In the latter case, the investment funds used to purchase the shares are also after-tax dollars and the other investor also has received a dividend of XXXXXXXXXX shares.

As noted in our previous letter, we recognize that the value of the original XXXXXXXXXX shares has declined, and that this is the usual result after a spin-off. This decline occurs because a significant amount of assets have been removed from the company. If the dividend had been paid in cash instead of shares, there would also have been a decline in value, as property has been removed from the company and been distributed to shareholders.

We would also emphasize that the situation for Canadian shareholders of XXXXXXXXXX is not unique to that corporation. The Canadian tax consequences of spin-offs were first highlighted by the AT&T reorganization in 1984. Since that time several other spin-offs have come to the attention of Revenue Canada. The number of such spin-offs has increased dramatically in recent years. The International Section has reviewed seventeen different foreign spin-offs from 1996 to date in response to queries from Canadian shareholders like yourself, including spin-offs done by GM, PepsiCo, Hanson and Dun & Bradstreet. In each case it was determined that a Canadian shareholder of the particular foreign corporation at the time of the spin-off had received a taxable dividend. In addition, in each case it was determined that the share distribution by the particular foreign corporation would also have been taxed as a dividend under the laws of the U.S. (or the U.K. where appropriate) except that it fell within specific provisions in the legislation of the foreign country that allowed for deferral of tax in that foreign country. As noted in our previous letter, the Canadian Income Tax Act does not provide for a deferral of the tax on the dividend income received as a result of a spin-off carried out by a foreign corporation.

We trust our comments are helpful.

Yours truly,

Roy Shultis
Director General
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

- 1 -