Principal Issues: 1. On its website, the CRA provides a list of corporations that have given the CRA permission to publish the fact that their spin-off share distribution meets the conditions of section 86.1. On this webpage, could the CRA provide two columns with respect to this list; one indicating the date in which the transaction occurred and another indicating the date the CRA confirmed that the transaction meets the conditions of section 86.1? 2) As a general rule, will the CRA consider the delay in receiving the corporation's approval as an important factor in its decision to waive the penalty for a late-filed section 86.1 election, where the year of the approval (and the publication on CRA's website) is not the same as the year the transaction was completed?
Position: 1. Yes. 2. Question of fact.
Reasons: 1. Effective for the 2020 and subsequent taxation years, the CRA website regarding the list of corporations that have given the CRA permission to publish the fact that their spin off share distribution meets the conditions of section 86.1 will have two columns; one indicating the date the transaction was completed (“date of transaction”) and a second column indicating the date the CRA confirmed that the transaction satisfies the conditions of section 86.1 (“date of approval”). The changes to the CRA’s website were made on July 7, 2020. 2. Where the year of the approval (and the publication on CRA's website) is not the same as the year the transaction was completed, the question of whether the CRA, as a general rule, will consider the delay in receiving the corporation's approval as an important factor in its decision to waive the penalty for a late-filed section 86.1 election is a case by case determination that will be made in light of all the facts and circumstances relating to a given situation.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, OCTOBER 7 2020
2020 APFF CONFERENCE
Question 3
Foreign "Spin-off" (reorganization of a foreign company with a spin-off) - Year of approval vs. year of completion of the transaction
Foreign corporations sometimes engage in corporate reorganizations in which they transfer the common shares of a subsidiary directly to the shareholders of the foreign corporation. U.S. and other publicly traded corporations engage in such transactions on occasion. For Canadian tax purposes, if no election is made, this will result in the taxpayer being taxed on a foreign source dividend in respect of such distribution of shares of the subsidiary. On the other hand, if the conditions of section 86.1 of the Income Tax Act (the "Act") are satisfied, it is possible to make an election that will then defer the taxation that was triggered for Canadian purposes. This election will result in a tax impact (capital gain or loss), but only when the taxpayer disposes of the shares of the parent and/or the subsidiary. This is obviously an election that is generally very advantageous where the amounts involved are more than nominal. The CRA posts on its website, and has done so since 1998, a list of eligible foreign corporate reorganizations with spin-offs that met the conditions of section 86.1. This information is very relevant and important for tax return preparers who would not necessarily have the relevant information in that regard if it were not for that list to draw their attention to it.
On its website, the CRA displays the names of the corporations involved. This is preceded by the column "Year of Approval". In practice, however, the transaction that would otherwise qualify for a tax deferral may well have occurred in an earlier year. As an example only, the "spin-off" by Honeywell Corporation, with respect to the shares of its subsidiary Garrett Motion, was completed on October 1, 2018, but received CRA approval in 2019. The same happened with Nuance Communication and its subsidiary Cerence (approval in 2020 while the transaction was completed in October 2019). Finally, some spin-offs of foreign corporations were able to receive approval from the Canadian Department of Finance via a comfort letter and this created a very long delay before it was clearly known, as those were "prescribed" distributions. The case of the Swiss company Novartis is a good example where the qualifying spin-off was completed in April 2019, a comfort letter was signed by the Department of Finance of Canada on February 14, 2020, but the promulgation of the regulations in this case may take a few years.
Questions to the CRA
a) Could the CRA put two columns on its website with respect to its list of CRA-approved foreign corporate reorganizations with spin-offs, one for the year in which the transaction occurred and another for the year in which it received CRA approval, all to minimize confusion among practitioners?
(b) Will the CRA generally agree to consider that the approval time is a significant factor in the decision not to apply the late-filing penalty under section 86.1 where the year of approval (and publication on the CRA website) is not the same as the year in which the transaction is completed?
CRA Responses
(a) To enable taxpayers and their representatives to determine whether a foreign corporate reorganization with a spin-off involves a qualifying disposition, the CRA provides on its website a list of corporate reorganizations that have authorized the CRA to publish the fact that their spin-off share distribution satisfies the conditions of section 86.1.
For the 2020 and subsequent taxation years, there will be two columns on the CRA's website for the list of CRA-approved foreign corporate reorganizations with spin-offs, one column indicating the date the transaction was completed (the "date of transaction") and another column indicating the date the CRA confirmed that the transaction satisfied the requirements of section 86 (the "date of approval").
Changes to the CRA website were made on July 7, 2020. As such, we invite you to visit the CRA website at https://www.canada.ca/fr/agence-revenu/services/impot/entreprises/sujets... et https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/e....
(b) The penalty set out in subsection 220(3.5) applicable, inter alia, upon the acceptance by the CRA of an application for an extension of time to file an election under paragraph 86.1(2)(f) may be waived pursuant to subsection 220(3.1).
Where the date of approval on the CRA website is not the same as the date of transaction, the weight that the CRA gives to the time between the date of transaction and the date of approval in deciding whether to waive the penalty for a late election under paragraph 86.1(2)(f) will depend on the facts and circumstances of each particular situation.
It should be noted that the Minister of Revenue has discretion with respect to a waiver application under subsection 220(3.1). This discretion is exercised in light of the guidelines set out in Information Circular 07-1, Taxpayer Relief Provisions.
Angelina Argento/Marie Claude Routhier
(514) 277-5798
October 7, 2020
2020-084876.
Response prepared in collaboration with:
Marie-Claude Poitras and Ian Charpentier, International Tax Division
International and Large Business Directorate
PROTECTED B