Principal Issues: (1) In the course of a corporate reorganisation, does a distribution of common shares of the capital stock of a particular corporation received by a Canadian individual shareholder with respect to all of his common shares of another corporation qualify as an eligible distribution under subsection 86.1(2)? (2) Do the central of management and control common law principles apply to determine whether a corporation is resident in the United States for the purpose of subparagraph 86.1(2)c)(i)?
Position: (1) Yes, provided that all conditions stated in paragraphs 86.1(2)(e) and 86.1(2)(f) are met. (2) Yes.
Reasons: (1) The conditions provided in paragraphs 86.1(2)(a) to 86.1(2)(c) are met. (2) Previous positions and application of the Act.
Mr. Luc Deslauriers Canada Revenue Agency 305, René-Lévesque Boulevard West 2018-078599 Montreal QC H2Z 1A6 G. Gladu
January 14, 2020
Subject: Eligible distribution (as defined in subsection 86.1(2))
This is in response to your November 8, 2018 interpretation request as to whether a distribution made in the course of a corporate reorganization of XXXXXXXXXX ("Parentco") and XXXXXXXXXX ("Splitco") represents an eligible distribution under subsection 86.1(2) of the Income Tax Act (the "Act").
Furthermore, you wish to confirm that common law principles relating to the central management and control of a corporation can be used to determine the residency of such corporations for the purposes of paragraph 86.1(2)(c)(i) of the Act.
Unless otherwise indicated, all legislative references in this letter are to the provisions of the Act.
The Facts
- Parentco is a public corporation incorporated as XXXXXXXXXX that carries on business in the XXXXXXXX field through XXXXXXXX operations.
- At the time of the corporate reorganization that took place in XXXXXXXX (the "Reorganization"), the capital stock of Parentco was composed of two classes of common shares (collectively, the "Common Shares"), one whose performance was related to its XXXXXXXX operations (the "Original Shares") and the other whose performance was related to its XXXXXXXX operations.
- At the time of the Reorganization, the Original Shares were not taxable Canadian property as defined in subsection 248(1).
- Splitco was incorporated XXXXXXXXXX by Parentco as part of the Reorganization. Parentco accordingly held all of the common shares of Splitco.
- Parentco transferred the assets and obligations relating to its XXXXXXXX operations to Splitco in consideration for common shares of the capital stock of Splitco (the "Distribution Shares").
- Parentco then distributed the Distribution Shares to its shareholders holding the Original Shares on a pro rata basis (the "Distribution").
- At the time of the Distribution, the central management and control of Parentco and Splitco were located XXXXXXXXXX and, at that time, they had never been resident in Canada.
- At the time of the Distribution, the Common Shares were widely distributed and actively traded on a designated stock exchange located in XXXXXXXX.
- Under the provisions of the XXXXXXXXXX Act, as amended from time to time, which apply to the Distribution, Parentco shareholders who were resident in XXXXXXXX at the time of the Distribution were not taxable in XXXXXXXX respecting the Distribution.
- Immediately following the Distribution, the attributes of the Original Shares were changed so as to qualify as deferred shares under the XXXXXXXX Act. These shares were then transferred to a designated third party and eventually cancelled by Parentco.
- The Distribution was not a distribution that is prescribed by Regulation, as required under paragraph 86.1(2)(d).
Our Comments
Subsection 86.1(1) provides inter alia that the amount of an eligible distribution received by a taxpayer is not included in computing the income of the taxpayer. Subsection 86.1(2) sets out the conditions that must be satisfied in order for a distribution to be an eligible distribution for the purposes of subsection 86.1(2). In particular, paragraph 86.1(2)(c)(i) requires that, at the time of the distribution, both corporations are resident in the United States and were never resident in Canada.
In this case, we are of the view that the common law principles of central management and control of a corporation must be used in determining the residence of Parentco and Splitco. The determination of a corporation's residency status under these principles is a question of fact and law that can only be resolved in light of all the facts and circumstances of the particular situation.
Furthermore, to the extent that the conditions in paragraphs 86.1(2)(e) and (f) have been satisfied and the Distribution was made in respect of all of the Common Shares of the capital stock of Parentco owned by the particular taxpayer at the time of the Distribution, it is our view that the Distribution is an eligible distribution to that taxpayer within the meaning of subsection 86.1(2).
However, if a transaction or transactions were entered into primarily for the purpose of qualifying as an eligible distribution for the purposes of section 86.1, in order to circumvent the application of any of subsections 85.1(3) to (6), the CRA would consider the application of the general anti-avoidance provision in subsection 245(2).
We hope that our comments will be of assistance.
Best regards,
Marie-Claude Routhier
Section Manager
for the Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch