Spinoffs and Your ACB: The Section 86.1 Election and the Foreign-Dividend Trap

Two kinds of spinoff, two completely different outcomes

Canadian spinoffs are engineered for deferral. A court-approved plan of arrangement, usually built on a butterfly reorganization and the automatic s. 86 rollover, means a Canadian holder realizes nothing on receipt. You split your existing pooled ACB between the two companies using the percentage the issuer publishes, and tax waits until you sell.

Foreign spinoffs are the opposite by default. Under the Act, the fair market value of the spun-off shares you receive is a taxable foreign dividend, included in income at your full marginal rate with no dividend tax credit, and the new shares' ACB is that same FMV while your original shares' ACB stays untouched. The cruel part is the asymmetry. The identical distribution is usually tax-free for US holders under their s. 355, with no withholding, so the broker statement and 1099 show nothing taxable and give a Canadian holder no hint that CRA sees income. The escape hatch is the s. 86.1 election, which this page walks through in full.

Canadian spinoffs and their published splits

For a domestic spinoff there is nothing to elect and nothing to file. You apply the issuer's published allocation to your pooled ACB and carry on. The published percentages for the majors, checked against issuer tax pages as of August 2026, are worth keeping on file.

The BCE and Nortel row is the standing cautionary tale. Holders moved over two thirds of their BCE cost base into Nortel, and those who never sold watched most of that basis ride a stock into bankruptcy. An allocation is not advice about which company to keep. It is just where your history now lives, and BCE still publishes dedicated ACB guidance for anyone who held through May 2000.

The s. 86.1 election, and what it actually does

For an eligible foreign spinoff, the election replaces the taxable dividend with an ACB split. No income is included, and instead a slice of your original shares' cost moves to the spinoff shares by relative fair market value. The statutory formula deducts A times B over C from each original share's cost, where A is the share's cost amount before the distribution, B is the FMV of the spinoff shares received per original share, and C is the combined FMV of the original and spinoff shares immediately after. The amount carved off becomes the spinoff shares' cost.

A worked example. You hold 100 shares of a US parent with a $10,000 ACB, and the spinoff hands you one new share for every four held, 25 shares. Right after the distribution the parent trades at $90 and the spinoff at $40, so each parent share carries $10 of spinoff value against $100 of combined value. The election moves $10 per share, leaving the parent at $9,000 and giving the 25 spinoff shares a $1,000 cost, $40 each. Your total ACB is still $10,000, just split. Without the election, the same facts produce $1,000 of foreign dividend income at your marginal rate.

Eligibility has real conditions. Both corporations must be US residents that were never Canadian residents, the shares must be widely held common shares listed or SEC-registered, the distribution must be pro rata and tax-free to US residents, and the corporation itself must file information with CRA within six months. Non-US foreign spinoffs face a higher bar (a treaty country plus a prescribed designation), which is why CRA's list is dominated by US names. Everything converts at the Bank of Canada rate for the distribution date, both the default dividend amount and the FMV inputs to the split.

Filing mechanics, including the paper-only rule

The election is a written letter filed with your return for the distribution year. There is no prescribed form. It states the number, cost, and FMV of your original shares immediately before the distribution and the number and FMV of both the original and spinoff shares immediately after, with your slip attached. Many issuers publish sample letters. The catch almost nobody mentions is that a return carrying a s. 86.1 election cannot be NETFILEd. The whole return goes in on paper that year. Quebec runs a parallel election with its own letter.

Miss the year and the election is not lost. Section 86.1 is on the prescribed late-election list, so you can apply within ten years of the end of the relevant tax year. The penalty is the lesser of $8,000 or $100 for each complete month the election is late, and CRA can waive it case by case, though not merely because you did not know the election existed.

The approval-lag problem nobody covers

Here is the practical mess. A spinoff only becomes electable once CRA approves it, and approval routinely lands well after your filing deadline. The recent record makes the point.

What do you do in the gap? Honestly, the law does not say, and no CRA document resolves it. Three positions exist in practice. The conservative route reports the default dividend now and files a T1 adjustment with the election after approval arrives, recovering the tax. Some filers instead paper-file the election in anticipation and accept reassessment risk if approval never comes. And the late-election route waits for approval and files under the relief provisions, paying or contesting the monthly penalty. CRA has said the delay between distribution and approval is an important factor in waiving that penalty, but it has given no blanket assurance.

One more wrinkle worth knowing. Absence from CRA's list can mean not yet approved, or it can mean the company never applied at all, as Fiat Chrysler chose not to for the Ferrari spinoff, leaving Canadian holders with a taxable dividend and no election. When in doubt, ask the company.

What brokers book, and why you should not trust it

No major Canadian broker publishes an official page on foreign-spinoff tax handling, and the observed behaviour, from dated user reports, is inconsistent in every direction. In the same 2023 spinoff one brokerage issued a T5 at fair market value while another issued nothing at all. Spun shares show up booked at zero cost, at FMV with the parent's book cost left unreduced (which double-counts basis), or not at all. Some spinoffs structured as exchanges generate a T5008 disposition instead of a dividend slip.

Whatever your statement shows, the correct figures come from the rules above, not the booking, which is the same lesson as the broader book cost problem. The US issuer's Form 8937 is the best public source for the distribution ratios and market values, with one caveat. Its allocation guidance is US law, so use its numbers as inputs and the s. 86.1 formula as the method. Cash received in lieu of a fractional share is its own small disposition, converted at that day's rate.

A spinoff is not a merger, a split-off, or a stock dividend

Getting the event right matters because the ACB mechanics differ. In a merger your old shares are disposed of, generally producing a gain or loss unless a rollover applies, and cash consideration is usually taxable. In a split-off you surrender parent shares to receive the new company, which is a disposition, not a pro-rata distribution. Return of capital pays you cash and quietly reduces the same share's ACB. A stock dividend hands you more shares of the same issuer as taxable income. A spinoff alone leaves you holding both companies with your original cost split between them, or, in the foreign default case, with new shares at FMV and a dividend to report.

Registered accounts get a pass, with one wrinkle

Inside a TFSA, RRSP, or other registered plan a spinoff has no tax consequence and the election is irrelevant. The one edge case is qualified-investment status. If the spun-off company is briefly unlisted on any designated exchange, the position can technically become a non-qualified investment with penalty tax exposure until it lists. Large spinoffs list immediately and never trigger this. Small or foreign spincos that linger over the counter are the ones to watch.

How ActiveACB handles spinoffs

ActiveACB carries the complete CRA eligible spin-offs record, 270 entries reaching back to 1998, and checks the corporate actions in your broker files against it. A spinoff that matches gets a definitive flag telling you it is CRA-approved and the election is available, instead of a generic warning. For major spinoffs with verified published ratios, including TC Energy and South Bow, the Brookfield reorganization, GE Vernova, Solventum, Veralto, and WK Kellogg, the engine applies the s. 86.1 ACB split automatically from the issuer's numbers. Everything else is flagged for review with the FMV data it found. Run your own broker export through the ACB calculator. Your first calculation is free. The adjusted cost base guide covers the underlying rules with worked examples.

Native broker files now calculate surrender-type split-offs as dispositions at the FMV of the shares received. After your first calculation, the trade editor’s corporate-action builder lets you enter the taxable dividend outcome, an s. 86.1 election, or a Canadian s. 86 rollover from the facts you filed. The builder also handles split-offs and qualifying mixed-consideration merger allocations when the offer provides the allocation facts. All of it lands on the same Schedule 3 report as the rest of your history, per the methodology.

Frequently asked questions

I got spinoff shares from a US company. Is that taxable?

By default yes. The fair market value of the shares is a taxable foreign dividend at your marginal rate with no dividend tax credit, even though the same distribution is tax-free for US holders. If CRA has approved the spinoff, a s. 86.1 election defers the income and splits your ACB instead.

What is a section 86.1 election and how do I file it?

A written letter filed with your return for the distribution year, stating the number, cost, and FMV of your original shares before the distribution and the number and FMV of both companies' shares after. There is no prescribed form, and a return carrying the election cannot be NETFILEd, so that year's return goes in on paper.

The spinoff isn't on CRA's list yet. What do I do this year?

The law does not settle it. The conservative route reports the default dividend and amends with a T1 adjustment once approval arrives. Others paper-file the election in anticipation, or late-file under the relief provisions after approval. Also check whether the company ever applied, since absence from the list can mean either not yet or never.

My broker shows the spun shares at $0 cost. Is that right?

Usually not. Under the default treatment their ACB is the FMV you included in income. Under a s. 86.1 election it is the slice carved from your original shares' ACB. Brokers book zero, FMV, or nothing at all, and often leave the parent's book cost unadjusted, so compute it yourself.

How do I split my ACB after a spinoff?

For a Canadian spinoff, apply the issuer's published percentage, like 88 and 12 for the Brookfield reorganization or 91 and 9 for TC Energy and South Bow. For an elected foreign spinoff, use the statutory formula on relative fair market values immediately after the distribution, converted at the Bank of Canada rate for that date.

Is a Canadian spinoff like Brookfield's taxable?

No. Domestic spinoffs are structured as tax-deferred plans of arrangement, so nothing is realized on receipt. You split your existing ACB by the published percentage and pay tax only when you eventually sell either company.

How late can I file the election?

Within ten years of the end of the relevant tax year, under the late-election relief provisions. The penalty is the lesser of $8,000 or $100 per complete month, and CRA has said the gap between distribution and its own approval date is an important factor in waiving it.

What about spinoffs in my TFSA or RRSP?

No tax and no election needed inside registered accounts. The only edge case is a spun-off company that stays unlisted on designated exchanges for a while, which can create a temporary non-qualified investment issue. Large spinoffs list immediately and avoid it.