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Personal Tax  ->  Stocks, Bonds etc. -> Foreign Spin-Offs - Tax Deferral for Distributions

Foreign Spin-Offs - Tax Deferral for Distributions

Income Tax Act s. 86.1

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 eligible 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

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.

Eligibility for Tax Deferral

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.  This must be done "before the end of the sixth month following the day on which the particular corporation first distributes a spin-off share in respect of the distribution".

See the link below to the list of eligible spin-offs approved by CRA.  It indicates if a particular spin-off is not listed, you should contact the corporation that distributed the spin-off shares, either directly or through a broker, to determine if the shares meet the eligibility criteria for the tax deferral election.

It is quite possible that the paperwork has not yet been approved by CRA, even if the spin-off is eligible.  In this case, filing without the deferral may be required, followed by an amendment request once the spin-off has been approved.

Eligibility for Tax Deferral - Quebec

Quebec Taxation Act s. 578.1 to 578.6

Similar treatment is provided for Quebec tax purposes.  Within the same six-month time frame as for CRA, the corporation must provide information to the Quebec Revenue Ministry.  The taxpayer should provide with their Quebec tax return a letter electing to use this provision, as well as a copy of the letter provided to the CRA.

Other Resources

Letter to Canadian shareholders of Valero Energy Corporation and additional information for Quebec income tax filers - from a 2013 spin-off, this letter outlines the requirements for a taxpayer making the election for tax deferral, both federally and for Quebec.

Canada Revenue Agency (CRA) Resources

NETFILE Other Restrictions

Foreign Spin-offs

Eligible spin-offs - shows spin-offs that have been approved by CRA 

Revised: April 01, 2022

 

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