Revenue Canada Revenu Canada Taxation Impôt
Head Office Bureau principal
Your file Votre reference Our file Notre reference
K.B. Harding (613) 957-2129
This is in reply to your letter of May 5, 1986 concerning the treatment of U.S. stock splits for purposes of Canadian tax.
Your letter states that you are encountering a significant number of changes in share capital of U.S. corporations which are described typically as a 2 for 1 or 3 for 2 stock splits. You indicated that the information forwarded to he shareholder by the company suggests that these are stock splits. However, where the shares have been assigned a par value and the par value does not change as a result of the split, you stated that the corporation has transferred an amount from their capital surplus or capital in excess of par to the capital stock account.
These transactions do not give rise to tax in the hands of the shareholder under U.S. law and you wish to know whether such transactions will be viewed as a dividend for Canadian tax purposes.
It is our view that a stock dividend arises when there is a distribution of shares together with a capitalization of retained earnings or other surplus account which are available for distribution as a dividend. See paragraph 4 of Interpretation Bulletin IT-88R which distinguishes the difference between a stock split and a stock dividend.
In the stock split described in paragraph 2 above, it is our view that such a transaction will constitute a stock dividend for purposes of the Canadian Income Tax Act since there appears to have been an increase in the paid-up capital of the shares when the firm capitalized their surplus accounts. Since the present definition of a dividend, which was amended in respect of dividends paid after May 23, 1985, does not exclude a stock dividend paid during the period by a corporation not resident in Canada, it is our view that any stock dividend is taxable in Canada in the year it is paid. The amount of the dividend will be the amount of the increase in the paid-up capital of the corporation resulting by the payment of the stock dividend.
Since the Income Tax Act was specifically amended in 1986 to tax stock dividends received by Canadian residents from non-resident corporations as income rather than as a capital gains, transactions described as stock splits which are in effect stock dividends must be reported as income for purposes of the Income Tax Act. In addition, where the transaction constitutes a stock dividend, the taxpayer will have acquired foreign property at a cost equal to the value of the dividend. However, for purposes of Part XI, this amount may not be equal to the fair market value of the property at the time of its acquisition.
We trust this is suitable for your purposes.
Yours truly,
ORIGINAL SIGNED BY Wm. R. McColm
for Director Reorganizations and Non-Resident Division Specialty Ratings Directorate Legislative and Intergovernmental Affairs Branch