Principal Issues: [TaxInterpretations translation] Procedure for the selection of 86.1.
Position: General comments.
Reasons: See response.
FINANCIAL SERVICES ROUND TABLE
2004 APFF CONFERENCE
Question 2
Foreign spin-offs and other foreign reorganizations
In order to qualify for the section 86.1 election, the foreign corporation initiating the spin-off must provide the CRA with various pieces of information for consideration and determination of the qualification of the spin-off for the purposes of that section.
When the shareholder wishes to make the election to not be subject to tax on the dividend received and allocate the ACB of the old shares to the new ones, the shareholder must provide information on the fair market value of the shares before the spin-off and immediately after the spin-off. Those values will form the basis for allocating the cost between the shares.
As a practical matter, Canadian shareholders do not always have the required information that must be provided to the CRA when making the election. This occurs in certain situations:
1- where this information is not provided to shareholders as it is considered confidential; and
2- where the spin-off is part of a larger transaction involving subsequent amalgamations and the securities are not traded on the stock exchange immediately after the spin-off that is the subject of the election, but rather after the entire restructuring.
Also, the information provided to U.S. shareholders allows them to use a percentage allocation of the cost among the shares instead of a pro rata calculation based on market value. It appears that the percentage calculation used by US shareholders based on section 355 of the Internal Revenue Code is substantially the same as the allocation obtained using the market values of the securities immediately after the spin-off.
Furthermore, foreign corporate reorganizations affect the taxation of many Canadian investors. This impact of the relevant sections of the I.T.A. (most often under sections 86.1, 87(8), 85.1(4)) must in most cases be analyzed by a tax specialist, through the review of the reorganization disclosure documents made available to all shareholders by the corporation. Many hours will have to be spent on this analysis and key information may have to be obtained from other documents to reach a conclusion. Most investors will not have the resources to analyze, or have analyzed, the tax impacts that affect them.
Do you plan to more effectively and consistently assist Canadian shareholders in assessing the Canadian tax implications of large multinational reorganizations where a significant proportion of Canadian investors may hold the securities?
CRA Response
A great deal of information concerning the application of section 86.1 is available to everyone on the CRA's website at the following address: www.cra-arc.gc.ca/tax/business/topics/foreign-e.html. At this address, you will find, inter alia, a description of the rules set out in section 86.1 and the consequences of their application, as well as the conditions that must be satisfied and the procedure to follow in order to benefit from the election provided for in that provision. Further information on section 86.1 is also available through various documents published by the CRA, such as the Income Tax Technical News (see, inter alia, No. 28 of April 24, 2003) or technical interpretations. In addition, it is also possible for a taxpayer to contact the CRA's Income Tax Rulings Directorate to obtain an advance ruling or a technical interpretation with respect to that provision. Finally, the CRA also offers a telephone information service.
Éric Allard-Pouliot
957-2097
October 8, 2004
2004-008567