Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Act current to 2017-08-27 and last amended on 2017-07-01. Previous Versions

Marginal note:Exchange of shares by a shareholder in course of reorganization of capital
  •  (1) Where, at a particular time after May 6, 1974, in the course of a reorganization of the capital of a corporation, a taxpayer has disposed of capital property that was all the shares of any particular class of the capital stock of the corporation that were owned by the taxpayer at the particular time (in this section referred to as the “old shares”), and property is receivable from the corporation therefor that includes other shares of the capital stock of the corporation (in this section referred to as the “new shares”), the following rules apply:

    • (a) the cost to the taxpayer of any property (other than new shares) receivable by the taxpayer for the old shares shall be deemed to be its fair market value at the time of the disposition;

    • (b) the cost to the taxpayer of any new shares of any class of the capital stock of the corporation receivable by the taxpayer for the old shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost bases to the taxpayer, immediately before the disposition, of the old shares exceeds the fair market value at that time of the consideration receivable for the old shares (other than new shares) that

      • (i) the fair market value, immediately after the disposition, of those new shares of that class,

      is of

      • (ii) the fair market value, immediately after the disposition, of all new shares of the capital stock of the corporation receivable by the taxpayer for the old shares; and

    • (c) the taxpayer shall be deemed to have disposed of the old shares for proceeds of disposition equal to the cost to the taxpayer of all new shares and other property receivable by the taxpayer for the old shares.

  • Marginal note:Idem

    (2) Notwithstanding paragraphs 86(1)(b) and 86(1)(c), where a taxpayer has disposed of old shares in circumstances described in subsection 86(1) and the fair market value of the old shares immediately before the disposition exceeds the total of

    • (a) the cost to the taxpayer of the property (other than new shares) receivable by the taxpayer for the old shares as determined under paragraph 86(1)(a), and

    • (b) the fair market value of the new shares, immediately after the disposition,

    and it is reasonable to regard any portion of the excess (in this subsection referred to as the “gift portion”) as a benefit that the taxpayer desired to have conferred on a person related to the taxpayer, the following rules apply:

    • (c) the taxpayer shall be deemed to have disposed of the old shares for proceeds of disposition equal to the lesser of

      • (i) the total of the cost to the taxpayer of the property as determined under paragraph 86(1)(a) and the gift portion

      and

      • (ii) the fair market value of the old shares immediately before the disposition,

    • (d) the taxpayer’s capital loss from the disposition of the old shares shall be deemed to be nil, and

    • (e) the cost to the taxpayer of any new shares of any class of the capital stock of the corporation receivable by the taxpayer for the old shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost bases to the taxpayer, immediately before the disposition, of the old shares exceeds the total determined under subparagraph 86(2)(c)(i) that

      • (i) the fair market value, immediately after the disposition, of the new shares of that class,

      is of

      • (ii) the fair market value, immediately after the disposition, of all new shares of the capital stock of the corporation receivable by the taxpayer for the old shares.

  • Marginal note:Computation of paid-up capital

    (2.1) Where subsection 86(1) applies to a disposition of shares of the capital stock of a corporation (in this subsection referred to as the “exchange”), in computing the paid-up capital in respect of a particular class of shares of the capital stock of the corporation at any particular time that is the time of, or any time after, the exchange,

    • (a) there shall be deducted the amount determined by the formula

      (A - B) × C/A

      where

      A
      is the total of all amounts each of which is the increase, if any, as a result of the exchange, in the paid-up capital in respect of a class of shares of the capital stock of the corporation, computed without reference to this subsection as it applies to the exchange,
      B
      is the amount, if any, by which the paid-up capital in respect of the old shares exceeds the fair market value of the consideration (other than shares of the capital stock of the corporation) given by the corporation for the old shares on the exchange, and
      C
      is the increase, if any, as a result of the exchange, in the paid-up capital in respect of the particular class of shares, computed without reference to this subsection as it applies to the exchange; and
    • (b) there shall be added an amount equal to the lesser of

      • (i) the amount, if any, by which

        • (A) the total of all amounts deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of that class paid by the corporation before the particular time

        exceeds

        • (B) the total that would be determined under clause 86(2.1)(b)(i)(A) if this Act were read without reference to paragraph 86(2.1)(a), and

      • (ii) the total of all amounts required by paragraph 86(2.1)(a) to be deducted in respect of that particular class of shares before the particular time.

  • Marginal note:Application

    (3) Subsections 86(1) and 86(2) do not apply in any case where subsection 85(1) or 85(2) applies.

  • Marginal note:Computation of adjusted cost base

    (4) Where a taxpayer has disposed of old shares in circumstances described in subsection 86(1),

    • (a) there shall be deducted after the disposition in computing the adjusted cost base to the taxpayer of each new share the amount determined by the formula

      A × B/C

      where

      A
      is the amount, if any, by which
      • (i) the total of all amounts deducted under paragraph 53(2)(g.1) in computing the adjusted cost base to the taxpayer of the old shares immediately before the disposition

      exceeds

      • (ii) the amount that would be the taxpayer’s capital gain for the taxation year that includes the time of the disposition from the disposition of the old shares if paragraph 40(1)(a) were read without reference to subparagraph (iii) of that paragraph,

      B
      is the fair market value of the new share at the time it was acquired by the taxpayer in consideration for the disposition of the old shares, and
      C
      is the total of all amounts each of which is the fair market value of a new share at the time it was acquired by the taxpayer in consideration for the disposition of the old shares; and
    • (b) the amount determined under paragraph 86(4)(a) in respect of the acquisition shall be added in computing the adjusted cost base to the taxpayer of the new share after the disposition.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts. R.S., 1985, c. 1 (5th Supp.), s. 86;
  • 1994, c. 21, s. 38;
  • 1995, c. 21, s. 29.

Foreign Spin-offs

Marginal note:Eligible distribution not included in income
  •  (1) Notwithstanding any other provision of this Part,

    • (a) the amount of an eligible distribution received by a taxpayer shall not be included in computing the income of the taxpayer; and

    • (b) subsection 52(2) does not apply to the eligible distribution received by the taxpayer.

  • Marginal note:Eligible distribution

    (2) For the purpose of this section, a distribution by a particular corporation that is received by a taxpayer is an eligible distribution if

    • (a) the distribution is with respect to all of the taxpayer’s common shares of the capital stock of the particular corporation (in this section referred to as the “original shares”);

    • (b) the distribution consists solely of common shares of the capital stock of another corporation that were owned by the particular corporation immediately before their distribution to the taxpayer (in this section referred to as the “spin-off shares”);

    • (c) in the case of a distribution that is not prescribed,

      • (i) at the time of the distribution, both corporations are resident in the United States and were never resident in Canada,

      • (ii) at the time of the distribution, the shares of the class that includes the original shares are widely held and

        • (A) are actively traded on a designated stock exchange in the United States, or

        • (B) are required, under the Securities Exchange Act of 1934 of the United States, as amended from time to time, to be registered with the Securities and Exchange Commission of the United States and are so registered, and

      • (iii) under the provisions of the Internal Revenue Code of 1986 of the United States, as amended from time to time, that apply to the distribution, the shareholders of the particular corporation who are resident in the United States are not taxable in respect of the distribution;

    • (d) in the case of a distribution that is prescribed,

      • (i) at the time of the distribution, both corporations are resident in the same country, other than the United States, with which Canada has a tax treaty (in this section referred to as the “foreign country”) and were never resident in Canada,

      • (ii) at the time of the distribution, the shares of the class that includes the original shares are widely held and actively traded on a designated stock exchange,

      • (iii) under the law of the foreign country, those shareholders of the particular corporation who are resident in that country are not taxable in respect of the distribution, and

      • (iv) the distribution is prescribed subject to such terms and conditions as are considered appropriate in the circumstances;

    • (e) 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, the particular corporation provides to the Minister information satisfactory to the Minister establishing

      • (i) that, at the time of the distribution, the shares of the class that includes the original shares are shares described in subparagraph (c)(ii) or (d)(ii),

      • (ii) that the particular corporation and the other corporation referred to in paragraph (b) were never resident in Canada,

      • (iii) the date of the distribution,

      • (iv) the type and fair market value of each property distributed to residents of Canada,

      • (v) the name and address of each resident of Canada that received property with respect to the distribution,

      • (vi) in the case of a distribution that is not prescribed, that the distribution is not taxable under the provisions of the Internal Revenue Code of 1986 of the United States, as amended from time to time, that apply to the distribution,

      • (vii) in the case of a distribution that is prescribed, that the distribution is not taxable under the law of the foreign country, and

      • (viii) such other matters that are required, in prescribed form; and

    • (f) the taxpayer elects in writing filed with the taxpayer’s return of income for the taxation year in which the distribution occurs that this section apply to the distribution and provides information satisfactory to the Minister

      • (i) of the number, cost amount (determined without reference to this section) and fair market value of the taxpayer’s original shares immediately before the distribution,

      • (ii) of the number, and fair market value, of the taxpayer’s original shares and the spin-off shares immediately after the distribution of the spin-off shares to the taxpayer,

      • (iii) except where the election is filed with the taxpayer’s return of income for the year in which the distribution occurs, concerning the amount of the distribution, the manner in which the distribution was reported by the taxpayer and the details of any subsequent disposition of original shares or spin-off shares for the purpose of determining any gains or losses from those dispositions, and

      • (iv) of such other matters that are required, in prescribed form.

  • Marginal note:Cost adjustments

    (3) Where a spin-off share is distributed by a corporation to a taxpayer pursuant to an eligible distribution with respect to an original share of the taxpayer,

    • (a) there shall be deducted for the purpose of computing the cost amount to the taxpayer of the original share at any time the amount determined by the formula

      A × (B/C)

      where

      A
      is the cost amount, determined without reference to this section, to the taxpayer of the original share at the time that is immediately before the distribution or, if the original share is disposed of by the taxpayer, before the distribution, at the time that is immediately before its disposition,
      B
      is the fair market value of the spin-off share immediately after its distribution to the taxpayer, and
      C
      is the total of
      • (i) the fair market value of the original share immediately after the distribution of the spin-off share to the taxpayer, and

      • (ii) the fair market value of the spin-off share immediately after its distribution to the taxpayer; and

    • (b) the cost to the taxpayer of the spin-off share is the amount by which the cost amount of the taxpayer’s original share was reduced as a result of paragraph (a).

  • Marginal note:Inventory

    (4) For the purpose of calculating the value of the property described in an inventory of a taxpayer’s business,

    • (a) an eligible distribution to the taxpayer of a spin-off share that is included in the inventory is deemed not to be an acquisition of property in the fiscal period of the business in which the distribution occurs; and

    • (b) for greater certainty, the value of the spin-off share is to be included in computing the value of the inventory at the end of that fiscal period.

  • Marginal note:Reassessments

    (5) Notwithstanding subsections 152(4) to (5), the Minister may make at any time such assessments, reassessments, determinations and redeterminations that are necessary where information is obtained that the conditions in subparagraph (2)(c)(iii) or (d)(iii) are not, or are no longer, satisfied.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts. 2001, c. 17, s. 64;
  • 2005, c. 30, s. 3;
  • 2007, c. 35, s. 68;
  • 2013, c. 34, s. 222.
 
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