10 September 1999 External T.I. 9922675 - 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:

Taxation of Canadian shareholders on a spin-off by a foreign corporation.

Position:

The share dividend received by Canadian shareholders is a taxable dividend. Moreover, voluntary foreign spin-offs do not qualify for a remission order.

Reasons:

Amendments to the Income Tax Act would be necessary to permit Canadian residents to defer the taxation of the dividend, The Department of Finance, which has responsibility for changes to the Act, has consistently rejected requests for such amendments.

992267
XXXXXXXXXX T. Lanzer
(613) 957-2129

September 10, 1999

Dear XXXXXXXXXX:

We are writing in response to your letter of August 18, 1999 concerning the tax consequences to Canadian shareholders of XXXXXXXXXX resulting from the spin-off of its XXXXXXXXXX business into a new company, XXXXXXXXXX and the distribution of shares of XXXXXXXXXX shareholders.

The situation for Canadian shareholders of XXXXXXXXXX is not unique. The Canadian tax consequences flowing from this type of U.S. spin-off were first highlighted by the reorganization of AT&T in 1984. Since that time, numerous other spin-offs have come to the attention of the Department. Senior officials have reviewed at least 20 different foreign spin-offs from 1996 to date in response to queries from Canadian shareholders. 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.

The responsibility for legislative changes lies with the Department of Finance. That Department has consistently, and as recently as June of this year, rejected requests for amendments to the Income Tax Act to exempt Canadian shareholders from tax on spin-offs undertaken by foreign corporations. Nevertheless, as I promised in our meeting, we have raised your concerns with our colleagues in the Department of Finance.

Under the Financial Administration Act, the Governor in Council, on the Minister's recommendation, may remit taxes where the Governor in Council considers that the collection of the tax is unreasonable, unjust or that it is otherwise in the public interest to remit the tax. Revenue Canada has developed guidelines that set out when a remission of income tax will be considered. Some circumstances in which a remission will be considered include extreme hardship, incorrect departmental action or advice and financial setback coupled with extenuating factors. Unfortunately, the shareholders of XXXXXXXXXX who received shares of XXXXXXXXXX do not, to our knowledge, fall into any of the categories set out in the guidelines.

Revenue Canada has kept, the Department of Finance aware of the numerous spin-off transactions which have taken place in recent years. In some of these cases the Department of Finance has been asked to grant a remission order to relieve the resulting tax consequences to Canadian shareholders. Only one remission order has been granted in respect of a spin-off. On May 15, 1985, the Department of Finance granted a remission order in respect of the 1984 spin-off of AT&T. The remission was granted primarily because the AT&T transaction was an involuntary spin-off resulting from a court order. However, no other remission orders have been granted because the spin-offs under consideration were voluntary on the part of the corporations involved, as is the spin-off described in your letter.

I trust my comments have exptained the Department's position on this matter.

Yours truly,

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