Section 86.1 Foreign Spin-Offs with “Poison Pill” Shareholder Rights Plans
We have now had the opportunity to review in detail the issue of whether section 86.1 of the Act can apply to provide taxpayers with a tax deferral in the situation where there is a foreign spin-off and the shares being spun-off have an attached “poison pill” shareholder rights plan. We have confirmed with the Department of Finance that there are generally no tax policy concerns with “typical” “poison pill” shareholder rights plans, that is, rights plans where the rights are only exercisable on the occurrence of a well-defined event (generally, the acquisition of a significant percentage of the shares of the particular corporation). Accordingly, we are prepared to accept that, generally, section 86.1 of the Act can apply in a situation involving such rights plans, provided that the particular rights plan was established for bona fide commercial reasons and not to obtain a tax benefit, and provided that the rights established under the plan do not have any significant value independent of the shares being spun-off at the time of the spin-off. Where a plan is a typical “poison pill” rights plan, then, provided that there are no unusual external factors (such as an imminent change of control of the spun-off corporation), we will presume that the existence of the plan will not in and of itself preclude the application of section 86.1 of the Act.
As shareholder rights plans can vary widely, it will always be a question of fact whether there was a tax benefit purpose in establishing a particular shareholder rights plan and whether the rights established under the plan have more than a nominal value at the time of the spin-off. In this regard, a copy of the shareholder rights plan or the information circular describing the nature of the shareholder rights plan (and, in particular, the contingent nature of the “poison pill” rights being transferred with the spin-off shares) should be included with the documents that are required to be provided by a foreign corporation to the CCRA in order for a distribution to qualify as an “eligible distribution” under section 86.1 of the Act. All relevant documents to be provided by the foreign corporation should continue to be forwarded to the International Tax Directorate of the Compliance Programs Branch of the CCRA.
Link to Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/itnews-28/archived-income-tax-technical-news-no-28.html#P18_706