Principal Issues: Does the cash payment for a fractional share qualify as an "eligible distribution" for the purposes of section 86.1 of the Income Tax Act?
Position: Yes, insofar as only shares are distributed by the corporation making the distribution and the cash payment does not come from that corporation.
Reasons:
Paragraph 86.1(2)(b) of the Income Tax Act.
January 30, 2003
XXXXXXXXXX Income Tax Rulings Directorate Tax Interpretation Service International Operations XXXXXXXXXX T.S.O. and Trusts Division XXXXXXXXXX Éric Allard-Pouliot XXXXXXXXXX 613-957-2097
2002-015730
Request for Technical Interpretation: Section 86.1 and Fractions of Shares
This is further to your email of August 9, 2002 regarding the above subject. More specifically, you wish to know whether the cash payment for a fraction of a share qualifies as an "eligible distribution" for the purposes of section 86.1 of the Income Tax Act (the "Act").
Facts
The facts set out in your request are as follows:
- XXXXXXXXXX (the "Broker") manages the securities accounts of its clients.
- As part of its operations, the Broker does not directly hold its clients' securities, which are instead deposited with an intermediary (the "Intermediary").
- As part of a reorganization, XXXXXXXXXX ("Aco") distributed to its shareholders one share of XXXXXXXXXX ("Bco") for each XXXXXXXXXX share of Aco they held (the "Reorganization"). Shareholders holding less than XXXXXXXXXX shares were entitled to a fraction of a share of Bco.
- As a result of the Reorganization, XXXXXXXXXX shares in Bco were deposited with the Intermediary for the benefit of clients of the Broker who were entitled to a fraction of a share of Bco.
- The XXXXXXXXXX Bco shares were subsequently sold by the Broker and the proceeds of that disposition were remitted to the Broker's clients in proportion to their rights in the XXXXXXXXXX Bco shares.
In light of the foregoing, you wish to know whether the Reorganization meets the condition set out in paragraph 86.1(2)(b).
Comments
Under paragraph 86.1(2)(b), in order for a distribution to qualify as an "eligible distribution", it 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 this case, this condition will only be satisfied if the only property distributed by Aco are common shares of Bco that were owned by Aco prior to the distribution.
Based on the facts submitted in support of your request, it appears that the only property distributed by Aco consists of common shares of Bco. In fact, the cash payment for the XXXXXXXXXX shares of Bco was made not by Aco but by the Broker. Consequently, to the extent that the shares so distributed were owned by Aco immediately prior to the distribution, the Reorganization meets the condition set out in paragraph 86.1(2)(b). The fact that the shares thus distributed by Aco to its shareholders are subsequently sold by a shareholder representative, such as the Broker or the Intermediary, and the proceeds of such sale were remitted to the shareholders does not change the fact that only shares were distributed by Aco. The sale by the Broker or the Intermediary of the shares distributed by Aco therefore does not prevent the Reorganization from meeting the condition set out in paragraph 86.1(2)(b). However, this sale will result in a gain or loss, as the case may be, for the holders of the shares so sold by the Broker or the Intermediary.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Best regards,
Alain Godin
Manager
for the Division Manager
International Operations and Trusts Section
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch