10 April 2001 External T.I. 2001-0074405 - 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:

Whether shares of one US corporation distributed by another US corporation to a Canadian shareholder may be received on a tax deferred basis.

Position: Yes

Reasons:

Provided all of the requirements in proposed section 86.1 are complied with.

		2001-007440
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
April 10, 2001

Dear XXXXXXXXXX:

Re: Foreign Spin-Off - XXXXXXXXXX

We are writing in reply to your letter of March 4, 2001 wherein you requested clarification on the Canadian income tax implications resulting from the distribution of XXXXXXXXXX shares which you received from XXXXXXXXXX.

Under the existing law, the fair market value of the distributed shares is included in the income of the recipient at the time they are received. However, the Minister of Finance has tabled on March 13, 2001, a Notice of Ways and Means Motion to amend the Income Tax Act which contains a proposal to add section 86.1 pertaining to the tax treatment of foreign spin-offs. Section 86.1 will provide for the tax-deferred receipt of such distributed shares by a Canadian shareholder only if all of the following conditions described in section 86.1 are met:

• The distribution results from common shares of the distributing corporation (original shares) owned by the taxpayer.
• The distribution to the taxpayer consists solely of common shares of a corporation (spin-off corporation) owned by the distributing corporation (there can be no non-share consideration).
• Both the distributing corporation and the spin-off corporation are resident in the same country at the time of distribution and have never been resident in Canada.
• The original shares represent a class of shares that are widely held and actively traded on a prescribed stock exchange.
• The distribution is not taxable to shareholders resident in the country in which the distributing corporation is resident.
• The distributing corporation provides certain information to the Canada Customs and Revenue Agency (the "CCRA") within six months of the distribution, including, the type and fair market value of the property distributed, and the names and addresses of Canadian taxpayers that received distributed property.
• The taxpayer files a special election in the income tax return for the year in which the distribution takes place to have the rollover provision apply to the distribution.

As noted above, one of the requirements, in order for a foreign spin-off to occur on a tax-deferred basis, is that the distributing corporation (i.e. XXXXXXXXXX) must provide to the CCRA certain information, including the name and address of each resident of Canada who received property with respect to the distribution. It is the responsibility of the Canadian shareholder to contact the foreign distributing corporation to ensure that it has provided the CCRA with the required information. Once the Canadian shareholder has confirmed with the distributing corporation that the distributing corporation has met the requirements in section 86.1, the Canadian shareholder may make an election to defer the tax arising on the receipt of the distributed shares.

Answers to many of the issues you have raised as well as additional information on the CCRA's administration of the proposed legislation in respect to foreign spin-offs may be accessed on the CCRA website at http://www.ccra-adrc.gc.ca/tax/business/ taxtopics/foreign-e.html. In the event that you do not have access to the internet, a copy of the information on the above-mentioned website is enclosed.

Proposed subsection 86.1(3) provides for a cost base adjustment to the original and spin-off shares based on their relative fair market values, as illustrated in this example.

Assume John owns one original common share of DC Ltd. (resident in the US), which distributes one spin-off share of SO Ltd. (also resident in the US) on a per-share basis to holders of common shares of DC Ltd. The cost amount of John's original share of DC Ltd. is $10 immediately before the distribution and its fair market value immediately after the distribution is $70. The fair market value of the SO Ltd. spin-off share is $30 immediately after the distribution (in your situation the fair market value of the Palm shares immediately after the distribution is $33.875US).

The adjusted cost base of the original share ($10) must be reallocated to the original and spin-off shares as follows:

Original Share $10 x $70/$100 = $7
Spin-off Share $10 x $30/$100 = $3

The gain or loss on a later sale of the original or spin-off shares would be the difference between the $7 or $3 calculated above and the net sale proceeds.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

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