Principal Issues: Whether a spin-off by a non-resident corporation qualifies as an "eligible distribution" within the meaning thereof in subsection 86.1(2) of the Act.
Position: No.
Reasons: The distribution of shares does not satisfy the requirements of subsection 86.1(2) of the Act.
XXXXXXXXXX 2007-025905 A. Seidel, CMA (613) 957-2058 January 11, 2008
Dear XXXXXXXXXX :
Re: Corporate Reorganization
This is in response to your August 24, 2007 letter in which you requested our comments as to whether shares of the capital stock of XXXXXXXXXX non-resident corporations received by you in XXXXXXXXXX in the course of the corporate spin-off described below would result in any Canadian tax consequences.
Background
You indicated in your letter that you are a shareholder of a XXXXXXXXXX corporation ("Opco") that XXXXXXXXXX "spun off" XXXXXXXXXX of its businesses. The spin-off was completed in two steps. First, Opco transferred parts of its existing business to XXXXXXXXXX corporations (the "Newcos"). Second, Opco distributed the shares of the Newcos to its shareholders on a pro rata basis.
You also indicated in your letter that, subsequent to the spin-off, Opco converted XXXXXXXXXX of its common shares into one common share in a reverse stock-split.
You asked us if any gain or loss or any amount is required to be included in computing your income in connection with these transactions.
Our Comments
The situation outlined in your letter relates to completed transactions involving a specific taxpayer. It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. As your situation involves a specific taxpayer and completed transactions, you should submit all relevant facts and documentation to your Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website which can be accessed on the Internet at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
Distribution by Opco
For purposes of the Income Tax Act (the "Act"), a pro rata distribution by a non-resident corporation to its shareholders of property (other than money) would normally be treated as a dividend-in-kind. The fair market value of the property received as a dividend-in-kind by a Canadian resident shareholder is included in the shareholder's income. Under the Act, the cost of the property received as a dividend-in-kind is deemed to be equal to the fair market value of the property (i.e., equal to the amount included in income).
Section 86.1 of the Act provides that an amount is not included in income in circumstances where the distribution involves shares of the capital stock of another corporation and the distribution qualifies as an "eligible distribution", as defined in subsection 86.1(2) of the Act. To qualify as an eligible distribution, a dividend-in-kind must be in respect of all the shareholder's common shares of the distributing corporation and must consist solely of common shares of the capital stock of another corporation that were owned by the distributing corporation immediately before the distribution. In addition, both the distributing corporation and the corporation(s) whose shares are distributed must be resident in the United States or resident in the same country with which Canada has a tax treaty. In this respect, XXXXXXXXXX is not a country with which Canada has entered into a tax treaty. Therefore, the distribution of the shares of the Newcos is not an "eligible distribution" and section 86.1 has no application.
Reverse Stock-Split
In general, where a share of the capital stock of a corporation is cancelled by the corporation, with or without any payment, the shareholder is considered to have disposed of the share to the issuing corporation. As a result, the cancellation of a share of the capital stock of a corporation may, depending on the facts and circumstances, result in a capital gain/loss, a deemed dividend or a benefit to the shareholder. However, it is possible to reduce the number of shares of a corporation under a reverse stock-split without triggering any immediate income tax consequences if the reverse stock-split does not affect any of the following:
? the proportion of shares held by all shareholders,
? the total capital represented by the issue,
? the interest, rights or privileges of the shareholders, and
? the capital structure of the corporation.
Our position on the tax implications of a reverse stock-split is set out in the first paragraph of Interpretation Bulletin IT-65, "Stock Splits and Consolidations" (available on the CRA website):
(W)here all the shares of a class of stock of a corporation are replaced by a ... lesser number of shares of the same class of stock of the same corporation in the same proportion for all shareholders, in circumstances where there is no change in the total capital represented by the issue, there is no change in the interest, rights or privileges of the shareholders and there are no concurrent changes in the capital structure of the corporation or the rights and privileges of other shareholders, no disposition or acquisition is considered to have occurred. The cost of the new shareholding to each shareholder will be the cost of the old shareholding divided into a different number of shares, e.g. ... in a 1 for 10 consolidation if the cost of an old share was $5 the cost of a new share is $50.
If you require any further assistance in determining if the reverse stock-split constitutes a disposition, please contact Art Seidel at (613) 957-2058.
We trust these comments will be of assistance.
Yours truly,
Daryl Boychuk
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch