Foreign spin-offs - Tax deferral for distributions
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 a deemed dividend to
residents of Canada. This would only affect Canadian shareholders who
owned these shares outside of an RRSP or RPP. The tax rules were changed
in 2001, so that these 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.
There was a time
limit within which taxpayers must apply to Canada Revenue Agency (CRA) to have their prior year tax returns amended to reduce income by the
amount of the deemed dividend from the foreign spin-off. This time limit
has expired. However, an extension for filing the
required election may be allowed under the "taxpayer
relief provisions" of
the Income Tax Act. For more information on the time extension, see the CRA
article on the extension for foreign spin-offs.
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. See also the CRA web page
on Foreign
Spin-offs.
Revised: April 08, 2011
