(March 22 – 16:30 ET) – The Canada Customs and Revenue Agency has posted a document on its Web site explaining how proposed legislation will impact the tax treatment of foreign spin-offs.
Last fall’s mini-budget proposed legislation pertaining to the tax treatment of foreign spin-offs. The legislation proposes to allow tax deferral of certain distributions by foreign corporations of spin-off shares to Canadian shareholders in deals completed since 1997. The election to defer tax is available for shareholders whether they are individuals, trusts or corporations.
Shareholders will be able to choose to exclude from income the amount that would ordinarily be considered a taxable foreign dividend. However, if this election is made, the adjusted cost base of the spin-off shares will not be their fair market value as would otherwise be the case. Instead, the adjusted cost base will be the cost of the original shares that generated the distribution of the spin-off shares, but this cost will be allocated between the original shares and the spin-off shares.
Shareholders will get this choice where the distribution meets the following criteria:
- the distribution occurred because the client owns shares in the distributing corporation;
- the distribution must consist only of common shares in another corporation owned by the distributing corporation;
- both the distributing corporation and the spun-off corporation must be residents of the United States at the time of the distribution and must never have been resident in Canada;
- the client’s original shares must be included in a class of stock that is widely held and actively traded on a prescribed stock exchange in the U.S. at the time of the distribution; and
- the U.S. resident shareholders of the distributing corporation must not be taxable under the U.S. Internal Revenue Code in respect of the distribution.
Although the legislation only refers to the U.S. it may also allow the election in the tax treatment other foreign spin-offs.