Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Can the CCRA provide information as to why a specific foreign spin-off did not qualify for section 86.1?
Position: No.
Reasons: Taxpayer information, including a foreign corporation, cannot be released without taxpayer consent.
XXXXXXXXXX
Dear XXXXXXXXXX:
I am writing in reply to your letter of June 24, 2002, concerning the application of section 86.1 of the Income Tax Act (the "Act") to two foreign spin-offs by XXXXXXXXXX (a U.S. corporation). I understand that one of the spin-offs occurred in XXXXXXXXXX and the other is expected to happen shortly.
Section 86.1 of the Act may allow a Canadian shareholder to elect to defer the tax arising on the receipt of shares distributed in a foreign spin-off where the following conditions are met:
? The distribution occurred because the taxpayer owns shares of the distributing corporation.
? The distribution consists solely of common shares of a corporation owned by the distributing corporation (there can be no non-share consideration such as cash).
? Both the distributing corporation and the spin-off corporation are resident in the United States at the time of distribution and have never been resident in Canada.
? The original shares are part of a class of shares that is widely held and actively traded on a prescribed stock exchange in the United States at the time of the distribution.
? The distribution is not taxable under the U.S. Internal Revenue Code to the U.S. resident shareholders of the distributing corporation.
Before a Canadian shareholder can elect, however, the foreign distributing corporation XXXXXXXXXX must provide the Canada Customs and Revenue Agency ("CCRA") with certain information needed to establish that the foreign distribution meets the above criteria. The information must generally be provided within six months of the distribution. Once the Canadian shareholder has confirmed with the distributing corporation that all the requirements have been met, he or she can elect under section 86.1 to defer the tax arising on the receipt of the distributed shares.
The confidentiality provisions of the Act prevent me from disclosing the details of a taxpayer's affairs, including those of a foreign corporation, without the taxpayer's written authorization. Therefore, I am unable to comment on whether XXXXXXXXXX has approached the CCRA with respect to the spin-offs mentioned in your letter, or whether the specific requirements for the section 86.1 election have or have not been met in those cases. You have to contact the foreign distributing corporation either directly, or through your broker, for this type of information.
The CCRA has been authorized by some foreign distributing corporations to disclose specific foreign spin-offs as having met the requirements for the section 86.1 election. These spin-offs are listed on the CCRA's website at http://www.ccra-adrc.gc.ca/tax/business/taxtopics/foreign-e.html. The listing is part of a series of questions and answers prepared by the CCRA regarding the administration of section 86.1, and is generally updated monthly.
For further information on the eligibility criteria for section 86.1, I would direct you to a Government Roundtable held in May 2002 as part of a conference hosted by the International Fiscal Association (Canadian Branch) ("IFA"). The Roundtable's proceedings can be accessed on IFA's website at http://www.ifacanada.org/wilson.html. At the Roundtable, the CCRA outlined its current positions on whether a foreign distribution that includes "poison pill" rights can satisfy the eligibility criteria for section 86.1, and what constitutes acceptable proof that a particular distribution is not taxable in the United States.
Finally, I understand that your spoke with one of my senior officers regarding the overall structure of the section 86.1 election, and that you expressed a concern that the election is too restrictive in its application, particularly in light of the stock market declines experienced by the technology sector in the last year. Since your concern relates to the policy underlying section 86.1 rather than its administration, I suggest that you write to the Minister of Finance, as he is responsible for fiscal policy as well as preparing additions and amendments to the Act:
The Honourable John Manley Minister of Finance Finance Canada Minister's Office 140 O'Connor Street Ottawa ON K1A 0G5
I trust these comments are of assistance.
Yours sincerely,
Bill McCloskey Assistant Commissioner Policy and Legislation Branch
T. Cook - 946-4165
2002-014964
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