CRA finds that a foreign demerger transaction does not give rise to a shareholder benefit

CRA has concluded that a foreign demerger transaction under which part of the assets of FA1 are transferred to FA2 (in the same jurisdiction) for no consideration, with FA2 issuing shares to the Canadian parent with a foreign paid-up capital equal to the book value of the assets which are transferred to it, and with a corresponding reduction in the foreign paid-up capital of the shares of FA1, qualifies as giving rise to a deemed dividend under draft s. 90(2), so that there is no taxable shareholder benefit to the Canadian parent.  Similar considerations arise if FA1 and FA2 are held through an intermediate foreign holding company.

An example of this type of demerger transaction is a German sideways spin reorganization.

Neal Armstrong.  Summary of 23 May 2013 IFA Round Table, Q. 2 under s. 90(2).