Principal Issues: Whether our administrative position in paragraph 6 of IT-450R will apply to fractional shares received pursuant to a foreign share for foreign share exchange
Position: Yes.
Reasons: See below.
February 8, 2011
Robert Thomson Regional International Tax Advisor HEADQUARTERS Burnaby-Fraser Tax Services Office A. Seidel, CMA 9737 King George Highway (613) 957-2058 5th Floor - Surrey Tower Surrey BC V3T 5W6 2011-039289
Fractional Shares
We are writing in response to your January 6, 2011 e-mail concerning the application of paragraph 6 of Interpretation Bulletin IT-450R "Share for Share Exchange" ("IT-450R") to a shareholder that receives cash in lieu of fractional shares as the result of a foreign share for foreign share exchange.
Background
Subsection 85.1(1) of the Income Tax Act (the "Act") provides a tax-free rollover to a taxpayer who holds shares in a corporation (the acquired corporation) and exchanges those shares for shares in the corporation that purchased the shares of the acquired corporation. In order for the rollover to apply, the taxpayer must have held the shares in the acquired corporation as capital property and the consideration received for these shares must be newly issued shares of the purchasing corporation. Pursuant to paragraph 85.1(2)(d), subsection 85.1(1) does not apply where the vendor receives consideration that is other than shares of a particular class of the capital stock of the purchaser corporation for the exchanged shares.
The situation often occurs, in such a share for share exchange, that a vendor cannot exchange all of the shares in the acquired corporation for a whole number of shares in the purchaser corporation such that the vendor becomes entitled to a fractional share in the purchaser corporation. Most corporations cannot, or will not, issue these fractional shares. In such cases, in lieu of such fractional shares, a vendor will be entitled to receive cash or other non-share consideration from the purchaser corporation. As stated in paragraph 6 of IT-450R, the Canada Revenue Agency ("CRA") will generally not deny the subsection 85.1(1) tax-free rollover to a vendor in these circumstances.
Subsection 85.1(5) of the Act provides a similar tax-free rollover to a taxpayer that holds shares in a corporation that is resident in a country other than Canada and exchanges those shares for shares of the capital stock of another corporation resident in a country other than Canada
(the "foreign purchaser"). Pursuant to paragraph 85.1(6)(c), subsection 85.1(5) does not apply where the vendor receives consideration that is other than shares in the foreign purchaser for the exchanged shares.
Issue
In the situation where a vendor cannot exchange all of the vendor's shares of a corporation that is resident in a country other than Canada for a whole number of shares in the foreign purchaser such that the vendor becomes entitled to fractional shares in the foreign purchaser and, in lieu of such fractional shares, a vendor becomes entitled to receive cash or other non-share consideration from the foreign purchaser, will the CRA extend the administrative position in paragraph 6 of IT-450R to foreign share for foreign share exchanges.
Our Comments
The phraseology of paragraph 85.1(6)(c) of the Act mirrors that of paragraph 85.1(2)(d). It is therefore our view that the administrative position in paragraph 6 of IT-450R should also apply in a foreign share for foreign share exchange. Accordingly, where a vendor cannot exchange all of the shares in the acquired corporation for a whole number of shares in the purchaser corporation, the vendor becomes entitled to a fractional share in the purchaser corporation and the vendor is entitled to receive cash or other non-share consideration from the purchaser corporation in lieu of such fractional shares, a subsection 85.1(5) rollover will be available to the vendor.
Consistent with the comments in paragraph 6 of IT-450R, where the amount of cash or the value of any other non-share consideration received by the vendor for the fractional shares does not exceed $200, the vendor can choose to report any gain or loss on the disposition of the fractional shares or can choose to ignore the computation of any gain or loss and reduce, by the amount of the non-share consideration received, the adjusted cost base of the shares received from the foreign purchaser. Where the amount of cash or the value of any non-share consideration received by the vendor exceeds $200, the vendor must report any gain or loss, as the case may be, from the disposition of the fractional shares.
We trust that these comments are of assistance. If you wish to discuss any of the above, please contact the writer.
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch