Is a Foreign Dividend Taxable?

I held 200 shares of Kraft Foods in my non-registered investment account. Kraft split into Kraft Foods and Mondelez International. I now have 66 shares of Kraft and 200 of Mondelez. I noticed that my T5 slip is indicated that I received a foreign dividend of over $3,000. Is this a taxable dividend? I didn't receive any cash and the value of the two shares together were more or less the same. Please advise as this is a nasty shock. 

There is some immediate tax relief available to this taxpayer through an election, but because this will affect the cost base values for future capital gains purposes, it would be a good idea for this reader to get some professional help. Here are the details:

When Kraft Foods Inc. was spun off to Mondelez International and Kraft Foods Group Inc. the 200 shares of Kraft foods Inc. were converted to 200 shares of Mondelez International plus 66.67 shares of Kraft Foods Group Inc. The .67 fractional share should have been paid out in cash – about $30.28US.

The deemed dividend represents the fair market value of the new Kraft Food Group Inc. shares. This is also the cost base for these shares. The cost base for the Mondelez shares is the cost base for the old Kraft Foods Inc. shares. The dividend is taxable as ordinary income.

However, an election can be made under Section 86.1 of the Income Tax Act to exclude the deemed dividend from income. This election must be made in writing and sent to CRA with your paper-filed return. You cannot EFILE or NETFILE if you make this election. In the letter you must specify that you are making an election under S. 86.1; the number and cost base for the original Kraft Foods Inc. shares; and the shares received as a result of the spin-off. If you make the election to exclude the dividends then the cost base of the post spin-off shares is based on the cost base of the original Kraft Foods Inc. shares. The cost base is allocated between the new shares according to the fair market value immediately after the spin-off.

For example, if the cost base of the pre spin-off shares was $20/share, the total ACB was $4,000. The $4,000 is allocated to the 200 + 66 shares according to their value immediately after the spin-off. The Mondelez shares were trading at $28 per share and the Kraft Foods Group Inc. shares were trading at $45.42 per share. The value of the 200 Mondelez shares were thus $28 x 200 = $5,600. The value of the 66 Kraft Foods Group shares were $45.42 x 66 = $2,997.72 US. The $4,000 cost is allocated as follows: Mondelez: $4,000 x $5,600/($5,600+$2,997.72)  =  $2,605.34; Kraft: $4,000 x $2,997.34/($5,600+$2,997.72)  =  $1,394.48. Use these numbers to determine any gain or loss on the sale of the new shares.