Information for foreign corporations

What does the foreign corporation need to do so that its Canadian shareholders can elect under section 86.1 in respect of the spin-off dividend?

U.S. corporations have to file certain information with the Canada Revenue Agency (CRA) so that a spin-off dividend will be eligible for the purposes of section 86.1. They have to provide the following information and documentation:

• Evidence that at the time of the distribution, the shares (of the original corporation) of the class that includes the original shares are widely held and,
  
  • for public corporations, actively traded on a prescribed stock exchange in the United States,
  • for private corporations, required, under the Securities Exchange Act of 1934 of the United States, to be registered with the Securities and Exchange Commission of the United States, and that they are so registered;
    
• The date of the distribution, and the type and fair market value of each property distributed to residents of Canada;
• The name and address of each resident of Canada (including brokers and other intermediaries) who received property with respect to the distribution;
• Evidence that the U.S. corporation and the spin-off corporation were never resident in Canada; and
• Evidence that the distribution is not taxable under the U.S. Internal Revenue Code. For this purpose, a copy of the ruling letter issued by the IRS confirming that the distribution is not taxable to U.S. residents should be provided if one was obtained. If a ruling letter was not obtained, evidence must be provided that:
  
  • the original corporation and the spin-off corporation reported, in their filings to the Securities and Exchange Commission, that their intention was to structure the transaction so that it be tax-free to shareholders for U.S. tax purpose; and
  • the original corporation communicated tax reporting instructions with regards to a tax-free distribution to U.S. shareholders following the distribution.

Top of page

If sufficient documentary evidence is not submitted, the CRA will try to contact the tax authorities of the other country to establish the taxability of the distribution to domestic shareholders.

The CRA will be able to review the submission more quickly if a copy of the information package mailed to shareholders announcing and/or describing the distribution is provided with the above information.

If the shares distributed in the course of the spin-off had rights to purchase other shares attached to them, the corporation should confirm that the rights plan was established for bona fide business purposes other than to obtain a tax benefit. It should also confirm that the rights did not have any significant value independent of the shares being spun-off at the time of the spin-off. The corporation should provide a copy of the shareholder rights plan or the information circular describing the nature of the rights plan (and, in particular, the contingent nature of the rights being transferred with the spin-off shares).

Non-U.S. corporations have to file the same information as U.S. corporations, with the following changes:

• The prescribed stock exchange need not be in the United States.
• The evidence that the distribution is tax free to the domestic shareholders should be from the tax authorities in the jurisdiction where the distribution took place. The nature of the required evidence will depend on the tax laws and policies of that jurisdiction.

Furthermore, for non-U.S. spin-offs, the distribution is also subject to other terms and conditions that are prescribed by the Department of Finance. If a non-U.S. spin-off meets all of the other conditions, the CRA will request that the Department of Finance consider it for prescription.

The foreign corporation has to send the above-noted information to:

The CRA has to receive this information before the end of the sixth month following the day of distribution. There is no provision for extending this deadline.