Foreign Spin-Offs

Canadian residents frequently own shares in foreign corporations (a "Distributor") that "spin off" shares of their foreign subsidiaries (a "Spin-out Corporation") to shareholders. These transactions often occur on a tax-free basis in the home jurisdiction either because it is a tax-favourable jurisdiction, or because the transaction qualifies for tax-free treatment. Generally, the Canadian income tax consequences to Canadian-resident shareholders are not taken into account in planning the transaction, particularly where the Distributor is widely held and the Canadians are not a significant shareholder bloc. This article discusses the considerations under the Income Tax Act (the "Act") of a spin-out to Canadian shareholders by anon-Canadian corporation. This is hardly an academic issue as Canadian taxpayers have been reassessed in respect of foreign spin-offs.