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Before making a major financial decision you
should consult a qualified professional.
Previously, when a foreign corporation spun off
a subsidiary company by distributing the shares in the subsidiary to
shareholders of the parent corporation, although it may have been done
tax-free to residents of the foreign country, it was an "in
kind" deemed dividend to
residents of Canada. This would only affect Canadian shareholders who
owned these shares outside of a registered
savings plan/account. The tax rules were changed
in 2001, so that eligible spin-offs can now be done on a tax-free
basis, by filing an election (in the form of a letter)
with the paper tax return for the year in which the
spin-off occurred.
Note that tax returns which
include this election are not eligible for NETFILE
or EFILE.
If the spin-off you're concerned with is not included on the CRA list of
eligible spin-offs (link at bottom), it's possible that the foreign corporation has not yet submitted the
paperwork to CRA, or it has not yet been approved. Contact the foreign
corporation to determine if an approval is in the works.
Dividend
Amount for Non-Eligible Foreign Spin-Offs
When a spin-off is not eligible for the tax deferral, the amount of the
dividend will be the fair market value (FMV) of the shares received in the
spin-off. This amount will be included in income in the same manner as
other taxable foreign dividends. The same FMV amount will be used as the adjusted
cost basis (ACB) of the spin-off shares received.
Eligibility for Tax Deferral
for Foreign Spin-Off
There are certain conditions that must be met
for these spin-offs to be done tax-free. The foreign corporation must
provide information to CRA regarding the spin-off, and have the tax-free
status approved by CRA. This must be done "before the end of the
sixth month following the day on which the particular corporation first
distributes a spin-off share in respect of the distribution".
See the link below to the list of eligible spin-offs approved by CRA.
It indicates if a particular spin-off is not listed, you should contact the
corporation that distributed the spin-off shares, either directly or through a
broker, to determine if the shares meet the eligibility criteria for the tax
deferral election.
It is quite possible that the paperwork has not yet
been approved by CRA, even if the spin-off is eligible. In this case,
filing without the deferral may be required, followed by an amendment request
once the spin-off has been approved.
Cost
Basis for Original and Spin-off Shares for Eligible Deferrals
Eligibility for
Foreign Spin-Off Tax Deferral - Quebec
Quebec Taxation Act s. 578.1 to 578.6
Similar treatment is provided for Quebec tax purposes. Within the
same six-month time frame as for CRA, the corporation must provide information
to the Quebec Revenue Ministry. The taxpayer should provide with their
Quebec tax return a letter electing to use this provision, as well as a copy
of the letter provided to the CRA.
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