Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Taxation of Canadian shareholders on a spin-off by a foreign corporation.
Position: A share dividend received by Canadian shareholders is a taxable dividend.
Reasons: Amendments to the Income Tax Act would be necessary to permit Canadian residents to defer the taxation of a share dividend. The Department of Finance, which has responsibility for changes to the Act, has consistently rejected requests for such amendments.
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Dear XXXXXXXXXX:
Thank you for your letter of September 3, 1999, on behalf of XXXXXXXXXX, concerning the tax consequences to Canadian shareholders of the XXXXXXXXXX spin-off by XXXXXXXXXX.
As you are aware, on the XXXXXXXXXX spin-off, shares of XXXXXXXXXX were distributed by XXXXXXXXXX to its shareholders on a pro rata basis. Under Canadian tax law, any shares distributed in such a way to Canadian shareholders are considered to be paid as dividends, which are subject to Canadian tax.
You have asked for a review of the current legislation governing spin-offs to ensure that it does not discourage stock investments and remains in line with United States law.
The situation for Canadian shareholders of XXXXXXXXXX is not unique. The Canadian tax consequences of this type of U.S. spin-off were first highlighted by the reorganization of AT&T in 1984. Since that time, numerous other spin-offs have come to our attention. Senior officials have reviewed the XXXXXXXXXX, and several other foreign spin-offs, from 1996 to the present in response to queries from Canadian shareholders. In each case, it was determined that a Canadian shareholder of the particular foreign corporation at the time of the spin-off had received a taxable dividend.
The responsibility for legislative changes to the Income Tax Act lies with the Department of Finance. In this regard, Finance officials have considered requests for amendments to the Act to exempt Canadian shareholders from tax on spin-offs undertaken by foreign corporations, but have concluded that amendments are not appropriate.
I trust my comments will assist you in replying to XXXXXXXXXX.
Yours sincerely,
Martin Cauchon