23 May 2013 Roundtable Q. , 2013-0483741C6

Principal Issues: Whether in the foreign spin off transaction described below, there is no shareholder benefit within the meaning of proposed paragraph 15(1.4)(e)?

Position: The foreign spin off transaction does not result in a shareholder benefit within the meaning of proposed paragraph 15(1.4)(e) by virtue of the exception in that provision for dividends.

Reasons: Proposed subsection 90(2) and paragraph 15(1.4)(e).

2013 International Fiscal Association Conference
May 23, 2013

Question 2: Shareholder Benefit Rules and Foreign Divisive Reorganization Transaction

Assume the following facts:

(a) FA1, FA2 and FA3 are each foreign affiliates of Canco (within the meaning of subsection 95(1) of the Act) and are not resident in Canada.

(b) Canco owns 100% of the shares of FA1 and FA1 owns 100% of the shares of FA2.

(c) FA3 is either formed with nominal assets by FA1 or comes into existence as part of the legal division of FA2 into two legal entities pursuant to the corporate laws of the foreign country where FA2 and FA3 are resident ("Division").

(d) As a result of the Division, FA2 transfers some of its assets (for no consideration) to FA3 and under foreign country corporate law, FA3 must issue shares to the shareholders of FA2 pro rata based on the number of shares they hold in FA2. In this case, only FA1 holds shares in FA2 with the result that FA1 will become the sole shareholder of FA3.

(e) Under the foreign country corporate law, the legal paid up capital of the shares of FA2 will be reduced by an amount equal to the book value of the assets transferred by FA2 to FA3.

(f) Similarly, under the foreign country corporate law, the legal paid up capital of the shares of FA3 will be equal to the book value of the assets FA3 received from FA2.

Would the CRA agree that in the hypothetical example above, the Division results in a pro rata distribution by FA2 (equal to the fair market value of the assets it transferred to FA3) and therefore the payment of a deemed dividend pursuant to proposed subsection 90(2), by FA2, such that there is no shareholder benefit pursuant to proposed paragraph 15(1.4)(e) ?

Would the answer be different if the shares of FA2 were held directly by Canco and as a result of the Division, shares of FA3 were issued to Canco?

Response:

We are of the view that in the hypothetical situation above, the Division results in a pro rata distribution on the shares of FA2. Therefore, the amount of the distribution will be deemed to be a dividend pursuant to proposed subsection 90(2). As a result, there is no shareholder benefit under proposed paragraph 15(1.4)(e) by virtue of the exception in that provision for dividends.

Our response would be the same if the shares of FA2 were held directly by Canco and as a result of the Division, shares of FA3 were issued to Canco.

Angelina Argento
2013-048374