23 July 2003 External T.I. 2003-0003045 - Corporate Distribution - Foreign 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the shares of XXXXXXXXXX , an Australian company, received by a resident of Canada as a result of a foreign spin-off by XXXXXXXXXX , another Australian company, is an "eligible distribution" in section 86.1 such that the resident can obtain a tax deferral on the distribution?

Position:     			No

Reasons: The conditions in subsection 86.1(2) that make the spin-off an "eligible distribution" are not satisfied.

XXXXXXXXXX 								2003-000304
	Gilles L. Gosselin
July 23, 2003

Dear XXXXXXXXXX:

Re: Foreign Spin-Off

We are writing in response to your letter dated January 7, 2003. We apologize for the delay.

In your letter you state that you are a shareholder of XXXXXXXXXX, an Australian company. In the XXXXXXXXXX taxation year you received from XXXXXXXXXX, as part of a "demerger" of the company, one share of XXXXXXXXXX (another Australian company) for every XXXXXXXXXX shares that you held in XXXXXXXXXX. You would like to know how the Income Tax Act (Canada)(the Act) applies to this transaction.

You state in your letter that you have spoken to the Canada Custom & Revenue Agency (the "CCRA") XXXXXXXXXX Tax Services Office (TSO) (XXXXXXXXXX) regarding the matter. As explained in Information Circular 70-6R5, it is not our practice to provide technical interpretations with respect to actual fact situations, especially when a TSO has already commented on the matter. Accordingly, you should submit all relevant facts and documentation to the TSO for their views. Moreover, it does not appear to us that you wish to obtain a tax ruling, as this service is only provided for a fee and only in accordance with the terms set out in Information Circular 70-6R5. However, for your assistance, we are prepared to offer the following general comments.

Generally, the transaction that you describe as a "demerger" is similar to what is commonly referred to as a "foreign spin-off". In both cases, a company divests itself of a business that it owns by transferring the ownership of that business to its shareholders by way of a dividend in kind, that is, by distributing shares in the business. This distribution is not a "gift", as you suggest in your letter, but is rather a dividend, that is, a transfer of some of the assets of the company (whether in cash or in kind) to the company's shareholders.

Accordingly, the distribution of the XXXXXXXXXX spin-off shares that you received is a dividend in kind and the fair market value of the spin-off shares at the time that they were received must be included in income as a dividend pursuant to section 90 of the Act. Also, for the purposes of the Act, the cost of your shares in XXXXXXXXXX does not change as a result of the spin-off. For more information about how a "foreign spin-off" is taxed under the Act, please see Technical News 11, dated Sept 30, 1997.

However, if certain conditions are met, section 86.1 of the Act does provide an election to defer tax on "eligible distributions" of spin-off shares by a foreign corporation that are received by Canadian resident shareholders of the foreign corporation. Generally, a distribution of spin-off shares is an "eligible distribution" only if the following conditions are met, pursuant to subsection 86.1(2) of the Act.

1. The distribution to the taxpayer must be because the taxpayer owns common shares in the distributing corporation (the "original shares").

2. The distribution to the taxpayer must consist solely of common shares of the capital stock of another corporation owned by the distributing corporation (the "spin-off shares"). The distribution to the taxpayer must not include non-share consideration.

3. In the case of a distribution that takes place in a country other than the United States and that is prescribed by regulation:

? Both the distributing corporation and the spun-off corporation (the issued shares of which are being spun-off) must be resident of the same foreign country, other than the United States, with which Canada has a tax treaty and those corporations must never have been resident in Canada;

? The taxpayer's original shares must be included in a class of stock that is widely held and actively traded on a prescribed stock exchange (see section 3201 of the Income Tax Regulations) at the time of the distribution;

? Under the law of the country in which the distributing corporation is resident, the shareholders of the distributing corporation must not be taxable in respect of the distribution; and

? Such terms and conditions as are considered appropriate in the circumstances with respect to the prescription must be met.

1. The distributing corporation must provide the Minister of National Revenue (the "Minister"), within six months of the distribution, evidence satisfactory to the Minister of certain matters including the type and fair market value of each property distributed to residents of Canada and the name and address of each resident of Canada that received property because of the distribution. Property that is distributed to residents of Canada includes, for example, property that is distributed to investment dealers resident in Canada as well as individual and corporate shareholders.

2. Generally, the taxpayer acquiring the spin-off shares must elect in writing (filed with the taxpayer's return of income for the year in which the distribution occurs) to have section 86.1 apply to the distribution and provide evidence satisfactory to the Minister of certain matters relating to the distribution and the taxpayer. The information submitted to the Minister must establish, for example, the number, cost amount and fair market value of the taxpayer's original shares immediately before the distribution, and the number, and the fair market value of the taxpayer's original shares and the spin-off shares immediately after the distribution.

If the above conditions are satisfied, the fair market value of the spin-off shares received by the taxpayer is not to be included in computing the taxpayer's income, pursuant to paragraph 86.1(1)(a) of the Act. Also, the cost of those shares is not their fair market value as otherwise provided by subsection 52(2) of the Act. Rather, the cost of the original shares is allocated between the original shares and the spin-off shares, pursuant to the formula in subsection 86.1(3) of the Act.

The transaction that you have described does not appear to be an "eligible distribution". For further general information regarding the taxation of foreign spin-offs, please visit our website at http://www.ccra-adrc.gc.ca/ and follow the links: "taxes", "international and non-resident", "fact sheets", and "foreign spin-offs".

The Information Circular and Technical News referred to herein can be viewed at http://www.ccra-adrc.gc.ca/ by following the "forms and publications" link.

Our comments are provided in accordance with the practise outlined in Information Circular 70-6R5. We hope they are of assistance.

Yours truly,

Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch