Section 86.1

Subsection 86.1(2) - Eligible distribution


Morasse v. The Queen, 2004 DTC 2435, 2004 TCC 239 (Informal Procedure)

The taxpayer, who held American Depositary Receipts for a Mexican public company (Telmex) became the owner of an equal number of shares of another Mexican company (America Movil) pursuant to a spin-off transaction implemented by Telmex. The spin-off was implemented using a Mexican corporate law procedure called "escisión" or "split-up" under which an existing company is divided, creating a new company to which specified assets and liabilities are allocated.

Miller J. accepted the Crown's position that as this type of spin-off did not involve stock of a subsidiary being spun-off by a parent, it would never be a prescribed transaction.

Administrative Policy

25 November 2021 CTF Roundtable Q. 3, 2021-0912101C6 - 86.1 exchange of shares

s. 86.1 treatment is not available where a spin-off is structured as a share exchange transaction

US Pubco (a US-listed corporation) will package (pursuant to a Canadian butterfly) one of its businesses into a new US corporation (US Pubco Spinco), and spin out all of the common shares of US Pubco Spinco to its common shareholders, including the Canadian-resident individual taxpayer, pursuant to an exchange offer (the Exchange Transaction), pursuant to which its shareholders will be provided with the option to exchange their US Pubco shares for US Pubco Spinco shares on a pro rata basis. The disposition by the Taxpayer of common shares of US Pubco is an essential condition to receipt of the shares of US Pubco Spinco.

If the Taxpayer accepts the offer and participates in the Exchange Transaction, will s. 86.1 apply, given that the transaction will not occur as dividend in kind of the US Pubco Spinco common shares?

CRA indicated that s. 86.1(1)(a) did not accommodate an exchange (here, a disposition of US Pubco shares in consideration for Spinco shares) so that this was not an eligible distribution contemplated by s. 86.1.

14 January 2020 Internal T.I. 2018-0785991I7 F - Subsection 86.1(2)

s. 86.1(2)(c)(i) references central management and control test/tracking shares satisfied s. 86.1(2)(a)

At all times, the central management and Parentco, and its newly-incorporated subsidiary (Splitco), consisted of two actively-traded classes of common shares, whose respective performance tracked two businesses. Parentco transferred one of the two businesses to Splitco in consideration for Splitco common shares, and distributed those shares (the "Distribution Shares") on one of the two classes of its common shares (the “Original Shares”) on a tax-exempt basis under the Code. The Original Shares ultimately were cancelled. In commenting as to whether the distribution was an eligible distribution, the Directorate stated:

[T]he common law principles of central management and control of a corporation must be used in determining the residence of Parentco and Splitco. …

Furthermore, to the extent that the conditions in paragraphs 86.1(2)(e) and (f) have been satisfied and the Distribution was made in respect of all of the Common Shares of the capital stock of Parentco owned by the particular taxpayer at the time of the Distribution, it is our view that the Distribution is an eligible distribution to that taxpayer within the meaning of subsection 86.1(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Common Share tracking shares were common shares 114

2014 Ruling 2014-0530961R3 - Cross-Border Butterfly

spin-off by U.S. pubco of U.S. spinco after Canadian butterfly

In connection with a spin-off by a U.S. public company (Foreign PubCo) of a U.S. subsidiary (Foreign Spinco) to which one of its businesses was transferred, there was a butterfly split-up of an indirect Canadian subsidiary (DC) directly and indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TCo) of DC was a subsidiary of Foreign Spinco. In connection with the subsequent spin-off by Foreign Pubco of Foreign Spinco, CRA ruled that provided that all of the conditions of ss. 86.1(2)(e) and (f) were met, the spin-off was an eligible distribution for purposes of s. 86.1. See summary under s. 55(1) – distribution.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution U.S./Cda b/f including conversion of Foreign Spinco and TC from fiscally disregarded to regarded for Code purposes/2-stage transfer to TC of cash assets/post-b/f dividend by DC/s. 86.1 treatment/proportionate allocation of Foreign Spinco debt 1479
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(b) - Subparagraph 55(3.1)(b)(i) pro rata allocation of Foreign Spinco debt 180

10 October 2014 APFF Roundtable Q. 4, 2014-0534831C6 F - 2014 APFF Roundtable, Q. 4 - Late-filed 86.1 election & 220(3.5) penalty

general principles applied to relief of s. 86.1 late-election penalties

Is the making of a late election generally accepted without application of the penalty of $100 per month if the absence of a timely election is attributable solely to ignorance of the availability of the election or of the occurrence of an eligible distribution? CRA stated (TaxInterpretations translation):

The CRA does not intend to provide systematic administrative relief in the situation described… . …Each submitted case must be reviewed on a case by case basis and the Minister has discretion in the making of her decision. This discretion [in ss. 220(3.1) and (3.2)] is exercised in light of the guidelines provided in Information Circular 07-1… .

8 October 2004 APFF Roundtable Q. 2, 2004-0085671C6 F - Scission d'entreprise - choix de 86.1

sources of CRA information on s. 86.1

CRA provided a general listing of sources of CRA assistance and information on s. 86.1.

Eligible spin-offs

//">"Information for foreign corporations" 6 March 2012: Respecting the requirement in s. 86.1(2)(b) that the distribution consist only of shares, CRA states:

If the shares distributed in the course of the spin-off had rights to purchase other shares attached to them, the corporation should confirm that the rights plan was established for bona fide business purposes other than to obtain a tax benefit. It should also confirm that the rights did not have any significant value independent of the shares being spun-off at the time of the spin-off.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 86.1 - Subsection 86.1(2) 118

Eligible spin-offs

Includes a simple numerical example. Also describes how a corporate shareholder which files electronically is to provide the required information, and states that a letter filed by a taxpayer with a paper return should contain:

◦ written notification that the shareholder is electing to defer tax relating to the distribution of spin-off shares from a U.S. (or other foreign) corporation, including a description of both the original and spin-off shares;

◦ the number, cost amount otherwise determined, and fair market value of the client's original shares, both immediately before the distribution and after the distribution; and

◦ the number and fair market value of the spin-off shares immediately after distribution.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 86.1 - Subsection 86.1(2) 115

Paragraph 86.1(2)(f)

Administrative Policy

7 October 2020 APFF Financial Strategies and Instruments Roundtable Q. 3, 2020-0848761C6 F - Réorganisations de sociétés étrangères avec dérivation admissibles

CRA is now disclosing the transaction date for eligible distributions

After noting that its webpage listing “eligible distributions” previously had only provided one date for each distribution, being the date of approval by CRA, it stated:

For the 2020 and subsequent taxation years, there will be two columns on the CRA's website for the list of CRA-approved foreign corporate reorganizations with spin-offs, one column indicating the date the transaction was completed (the "date of transaction") and another column indicating the date the CRA confirmed that the transaction satisfied the requirements of section 86 (the "date of approval").

Changes to the CRA website were made on July 7, 2020.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.1) CRA may consider the delays until its approval of a s. 86.1 spin-off re s. 220(3.5) penalties 162