Vol. 137, No. 47 — November 22, 2003

Regulations Amending the Income Tax Regulations (Prescribed Distributions)

Statutory Authority

Income Tax Act

Sponsoring Department

Department of Finance

REGULATORY IMPACT
ANALYSIS STATEMENT

Description

This amendment to the Income Tax Regulations (the "Regulations") prescribes two distributions of shares for the purpose of the tax-deferral rules for foreign spin-off transactions in section 86.1 of the Income Tax Act (the "Act"). The prescriptions concern a distribution undertaken by Active Bioteck AB, and a distribution undertaken by Orckit Communications Ltd. As a result of this amendment, Canadian shareholders of each company will be eligible for a tax deferral in respect of the distributions.

In 2001, Parliament enacted section 86.1 of the Act, which provides Canadian shareholders with a tax deferral in respect of certain distributions made by a foreign corporation of shares it owns in another foreign corporation. This change to the income tax law was applicable to "eligible distributions" received after 1997.

Section 86.1 of the Act requires that various conditions be met before a distribution is considered to be an "eligible distribution." The various conditions ensure, among other things, that Canadian shareholders of a foreign corporation are not treated more favourably with respect to a distribution than Canadian shareholders receiving a similar distribution from a Canadian corporation. In doing so, the rules apply to certain types of spin-offs only and distinguish between U.S. and non-U.S. spin-off transactions.

In particular, certain spin-off transactions under the United States' Internal Revenue Code were considered acceptable without the need for prescription, and this result is provided for in subsection 86.1(2) of the Act. However, there is not the same familiarity with the way in which foreign countries other than the United States approach the taxation of spin-off transactions, thus resulting in the additional requirement in section 86.1 that a non-U.S. spin-off transaction be "prescribed."

This amendment to the Regulations prescribes two distributions with respect to foreign spin-off transactions:

1. The distribution by Active Bioteck AB on May 10, 1999, of shares of Wilhelm Sonesson AB; and

2. The distribution by Orckit Communications Ltd. on June 30, 2000, of shares of Tioga Technologies Ltd.

Alternatives

No alternatives were considered as the Act mandates prescription.

Benefits and Costs

The amendment is relieving in nature, with a deferral of income tax being provided to eligible shareholders.

Consultation

The particular corporations identified in these Regulations were consulted as was the Canada Customs and Revenue Agency.

Compliance and Enforcement

The Income Tax Act provides the necessary compliance mechanisms.

Contact

Kerry Harnish, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario K1A 0G5, (613) 992-4385.

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to section 221 (see footnote a)  of the Income Tax Act (see footnote b) , proposes to make the annexed Regulations Amending the Income Tax Regulations (Prescribed Distributions).

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Kerry Harnish, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 17th Floor, East Tower, 140 O'Connor Street, Ottawa, Canada, K1A 0G5.

Ottawa, November 19, 2003

EILEEN BOYD
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE INCOME TAX REGULATIONS (PRESCRIBED DISTRIBUTIONS)

AMENDMENTS

1. The heading of Part LVI of the Income Tax Regulations (see footnote 1)  is replaced by the following:

PRESCRIBED DISTRIBUTIONS

2. Section 5600 of the Regulations is replaced by the following:

5600. For the purpose of section 86.1 of the Act, the following distributions of shares are prescribed:

(a) the distribution by Active Bioteck AB, on May 10, 1999, of shares of Wilhelm Sonesson AB; and

(b) the distribution by Orckit Communications Ltd., on June 30, 2000, of shares of Tioga Technologies Ltd.

COMING INTO FORCE

3. These Regulations are deemed to have come into force on January 1, 1998.

[47-1-o]

Footnote a 

S.C. 2000, c. 12, s. 142 (Sch. 2, par. 1(z.34))

Footnote b 

R.S., c. 1 (5th Supp.)

Footnote 1 

C.R.C., c. 945

NOTICE:
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