Commentary on October 24, 2012 Notice of Ways and Means Motion Relating to Tax Matters - Foreign Spin-offs
Nov 1, 2012
Section 86.1 provides a tax deferral with respect to distributions to Canadian resident shareholders of spin-off shares by eligible foreign corporations. With respect to distributing corporations that are U.S. corporations, the current law provides that the deferral is available only where the distributing corporation’s shares are widely held and are actively traded on a designated stock exchange in the U.S. The amendment extends the class of eligible corporations to include U.S. corporations whose shares are widely held and are required under the U.S. Securities and Exchange Act to be registered with the SEC, provided the shares are so registered. In general, a class of shares of a U.S. corporation must be registered with the SEC if more than 500 shareholders own shares of the class, the corporation has more than $10 million in assets and shares of the class will be traded on a national securities exchange.
Related amendments are proposed to be made to the shareholder benefits provisions in section 15 of the Act. Subject to certain exceptions, section 15 requires a shareholder of a corporation to include in income the amount or value of a benefit conferred by the corporation on the shareholder. The provision also applies to benefits conferred on a person in contemplation of the person becoming a shareholder of the corporation.
Existing paragraph 15(1)(a) provides exceptions to the application of section 15 for benefits conferred by a corporation upon a reduction of paid-up capital by the corporation, the redemption, acquisition or cancellation by the corporation of its shares, the winding–up, discontinuance or reorganization of its business or on the winding-up of the corporation. Paragraph 15(1)(a) is amended to apply only where the corporation is a resident of Canada. New paragraph 15(1)(a.1) is introduced to provide a narrower range of exceptions where the corporation is not a resident of Canada. Under this provision, section 15 will not apply to benefits conferred by a non-resident corporation upon a foreign spin-off to which subsection 86.1(1) applies. Section 15 will also not apply to a reduction of paid-up capital from a non-resident corporation that is not a foreign affiliate of the shareholder or, if the non-resident corporation is a foreign affiliate of the shareholder, section 15 will not apply to a reduction of capital that is a “qualifying return of capital” within the meaning of subsection 90(3) of the Act. In each of those cases, a distribution on the reduction of paid capital will reduce the shareholder’s adjusted cost base in the shares of the non-resident corporation. Finally, section 15 will not apply to benefits conferred on a shareholder by a non-resident corporation by the redemption, acquisition or cancellation by the corporation of its shares or on the winding-up, or liquidation and dissolution, of the corporation.
New paragraph 15(1.4)(e) deems a non-resident corporation (the original corporation) to have conferred a benefit on its shareholder if the original corporation is divided under the laws of the foreign jurisdiction that governs the original corporation and the shareholder acquires a share of another corporation as a consequence of the division of the original corporation. The provision effectively overrides the decision of the Tax Court of Canada in Morasse,  2 C.T.C. 3085, which provides that section 15 did not apply to an “escision” under Mexican law. Paragraph 15(1.4)(e) will not apply, however, to foreign spin-offs to which subsection 86.1(1) applies or to certain other transactions that are otherwise expressly exempted from the application of section 15.
Section 15 is amended to apply as well to a benefit conferred on a person who is a member of a partnership that is a shareholder of a corporation. A new interpretive rule is provided in paragraph 15(1.4)(b) to address tiered partnerships. New paragraph 15(1.4)(a) provides some clarity on, and extension to, the meaning of a “contemplated shareholder.”
New paragraphs 15(1.4)(c) and (d) provide interpretative rules that generally deem a section 15 benefit to have been conferred on a shareholder of a corporation, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder of the corporation where the corporation confers a benefit on an individual who does not deal at arm’s length or is affiliated with any of those persons, except to the extent the value of the benefit is included in the income of the individual or any other person.
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